LIBRARY OF CONGRESS. 



Chap. Copyright No.... 

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UNITED STATES OF AMERI 



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APPLETONS' 
SCIENCE TEXT-BOOKS 



POLITICAL ECONOMY 



g^ppbtoirs' Stieim Cf^t-§ocrks 



THE ELEMENTS OF 



POLITICAL ECONOMY 



WITH SOME APPLICATIONS TO 
QUESTIONS OF THE DAY 






J. LAURENCE LAUGHLIN, Ph. D. 

HEAD PROFESSOR OF POLITICAL ECONOMY 
IN THE UNIVERSITY OF CHICAGO 




NEW YORK . : • CINCINNATI . : • CHICAGO 
AMERICAN BOOK COMPANY 



H^ 



,i 



Copyright, 1887 
Bv D. APPLETON AND COMPANY 

Copyright, 1896 

By AMERICAN BOOK COMPANY 

W. P. 3 



TO 

HENRV ADAMS 

PRECEPTOR AND FRIEND 

A 

TRIBUTE OF GRATITUDE 



(V) 



PREFACE, 



The public questions of our day in the United 
States are deeply affected by economic considera- 
tions, and yet the training of mind adequate for 
an intelligent decision upon economic problems 
has been very slight. No one who looks into the 
future can escape the conviction that our national 
prosperity will depend in no slight degree upon 
the diffusion of satisfactory economic and political 
education. There is good reason to suppose that 
public questions and the economic principles which 
underlie them can, if properly presented, be un- 
derstood by the average American youth, whose 
education is restricted to the high-school or the 
academy, and it is the youth of the present who 
are to give direction to our national policy. 

This book addresses itself to the task of pre- 
senting in a plain and simple form the elementary 
principles of political economy. The main topics 
are treated; the fundamental principles are em- 
phasized ; but no effort is made to produce a de- 

(vii) 



viii PREFACE. 

tailed and exhaustive treatise. A pupil will not 
become an economist by studying this book alone. 
An attempt has been made, however, to present 
the different branches of the subject in their just 
proportion and symmetry, so far as the limits of 
the volume permit. 

It has seemed to be an important part of an 
elementary treatise on economics to make applica- 
tions of principles to the leading questions of the 
day. For this reason such topics as Socialism, 
Taxation, the National Debt, Free Trade and Pro- 
tection, Bimetallism, United States Notes, Bank- 
ing, the National Banking System, the Labor 
Problem, and Co-operation, have been treated in 
a brief and simple manner in Part II. 

With the assumption that Political Economy is 
inhuman and pitiless, the reader will find no sym- 
pathy in these pages, because such a belief is 
founded on an inadequate understanding of what 
the principles of a science really are, and principles 
can not be regarded as having personal qualities. 
On the contrary, it seems clear that the funda- 
mental principles of economics are, when ultimate- 
ly analyzed, but expressions of Christian truth. 
With this conviction, the " labor problem " has 
been here treated, not as a question to be settled 
by legislation, but as one to be met by all the 
forces which make for Christian character and self- 
mastery. 



PREFACE. ix 

Teachers may use the book for a long or a 
short course. When there is time for no more 
than, perhaps, twenty-five lessons. Part 1 will be 
sufficient, as it completes the study of the princi- 
ples. If a greater number of lessons is desired, 
selections may be made from the practical portions 
of Part II. A still more extensive course is pos- 
sible. The outline here presented may be com- 
pleted by collateral reading from some of the 
books mentioned in the reference list. 

The questions and problems at the end of each 
chapter in Part I are intended to stimulate the pu- 
pil to think out applications of principles. These 
questions are not provided in Part II, because its 
chapters are in themselves applications of prin- 
ciples. 

Cambridge, Mass., August, i88y. 



CONTENTS. 



PART I. 
PRINCIPLES OF POLITICAL ECONOMY. 

INTRODUCTION. 

CHAPTER I. PAGE 

Wealth 3 

I. What society does for its members. 2. With what po- 
litical economy is concerned. 3. Material wealth. 4. Im- 
material wealth. 5. Property in wealth. 6. Money only a 
part of wealth. 7. Exercises. 

BOOK I. 

PRODUCTION, 

CHAPTER II. 
The Nature and Requisites of Production . . .10 
8. Our wants are various and unlimited. 9. Production is 
reciprocal : meaning of a market. 10. The requisites of 
production. 11. Land. 12. Labor. 13. Capital. 14. Exer- 
cises. 

CHAPTER HI. 

Diminishing Returns from Natural Agents . . .17 
15. Natural agents include more than land. 16. Wealth 
increases only through the requisites of production. 17. Land 

(xi) 



xii CONTENTS. 

PAGB 

limited in quantity. i8. Land varies in quality. 19. Law 
of diminishing returns. 20. Objection to the law. 21. The 
law as applied to mines. 22. Improvements counteract the 
law. 23. Exercises. 



25 



CHAPTER IV. 

Labor and its Increase 

24. More produced when men utilize nature's forces. 25. 
Who compose the laboring-classes. 26. Physical qualities. 
27. Mental qualities. 28. Moral qualities. 29. Law of Mal- 
thus. 30. Checks on population. 31. Increase of worst 
classes unfortunate. 32. Standard of living. 33. Distinction 
between productive and unproductive labor. 34. Exercises. 

CHAPTER V. 

Capital and its Increase 36 

35. Distinction between wealth and capital. 36. Capital 
necessary to labor. 37. Capital the result of saving, 38. 
Capital constantly consumed. 39. Capital employs labor. 
40. Fixed and circulating capital. 41. Growth of capital de- 
pends on the amount which can be saved. 42. And on the 
disposition to save. 43. Exercises. 

CHAPTER VI. 

Efficiency of Production 46 

44. Causes affecting the amount of wealth produced. 45, 
The ownership of land. 46, Division of labor gives dexterity. 
47. Enables a classification according to capacity. 48. Sepa- 
ration of employments according to natural advantages. 49. 
Division of labor greatest in producing articles of general use. 
50. Large production. 51. Managing ability. 52. Exercises. 



BOOK II. 

EXCHANGE. 

CHAPTER VIL 
Value 57 

53. The object of Book II. 54. Value is purchasing power. 
55. Value is a ratio. 56. Why an article has value. 57. To 
have value, an article must be transferable. 58. A sacrifice 



CONTENTS. 



Xlll 



PAGE 

must be necessary to get it. 59. It must satisfy some human 
desire. 60. A common denominator of value. 61. Price is 
value expressed in money. 62. There can not be a general 
rise or fall of values. 63. There can be a general rise or 
fall of prices. 64. Exercises. 

CHAPTER VIII. 

Money 67 

65. Money and credit the tools of exchange. 66. Money a 
common denominator of value. 67. Money must possess 
value. 68. Difficulty arising from the lack of a medium of 
exchange. 69. Different articles used as money. 70. Why 
gold and silver make the best money. 71. Coining money. 

72. Gold and silver not a just standard for long contracts. 

73. The value of money varies. 74. The multiple standard. 
75. An increase of money no advantage. 76. The dollar 
changes in value. 77. Distinction between wealth, capital, 
and money. 78. Exercises. 

CHAPTER IX. 

Home and Foreign Trade 83 

79. Trade exists to satisfy human wants. 80. Trade due 
to division of labor. 81. Complexity of trade due to the va- 
riety of desires. 82. Buying and selling. 83. Producers and 
consumers not different classes. 84. Separation of employ- 
ments necessitates stores, or markets. 85. The expense of 
merchants necessary for the exchange of goods. 86. Ex- 
change in actual practice. 87. Division of labor according to 
capacity and natural resources. 88. Men buy most by pro- 
ducing that which is produced to most advantage. 89. Com- 
parative ease of production the cause of foreign trade. 90. 
Home and foreign trade depend upon the same principles. 
91. The gain from home and foreign trade. 92. Exercises. 

CHAPTER X. 
Demand and Supply ........ 104 

93. Our object to find the laws of value. 94. Under the 
supposition that competition is free. 95. Demand and sup- 
ply. 96. General demand and supply. 97. General over- 
production impossible, 98. Overproduction of a particular 
commodity. 99. The law of demand and supply as affecting 
value. 100. Exercises. 



xiv CONTENTS. 

CHAPTER XI. PAGE 

Cost of Production iii 

loi. Three classes of commodities. 102. True and popu- 
lar use of the phrase " cost of production." 103. The sac- 
rifice of the capitalist in production. 104. The sacrifice of 
the laborer in production. 105. Sacrifice different from re- 
muneration. 106. Remuneration in proportion to sacrifice, 
if competition is free. 107. Cost of production not made up 
of wages and interest. 108. Cost of production analyzed. 
109. Normal value depends upon cost of production, when 
competition is free. no. Market value fluctuates about nor- 
mal value. III. Noi-mal value of manufactured goods tends 
to decline. 112. Exercises. 

CHAPTER XII. 

The Value of Commodities affected by the Law of Di- 
minishing Returns 122 

113. The problem as to the value of agricultural commodi- 
ties. 114. The law of value for this class. 115. Market 
fluctuations due to demand and supply. 116. Durability of 
gold and silver. 117. Principles governing the value of gold 
and silver. 118. Upward tendency of the prices of agricul- 
tural commodities, iig. Forces operating against this tend- 
ency. 120. Exercises. 

CHAPTER XIII. 

The Value of Commodities where Competition is not 
free ........... 131 

121. Absence of free competition. 122. If supply is fixed, 
value depends on demand, 123. Artificial limitation of the 
supply. 124. No free competition of laborers. 125. Nor of 
capital. 126. Where competition is not free, rewards in pro- 
duction are on different levels. 127. Reciprocal demand 
governs value between non-competing groups. 128. This 
law also controls exchanges between countries. 129. Goods 
are exchanged against goods. 130. Exports tend to balance 
imports. 131. Exercises. 

CHAPTER XIV. 
Credit 143 

132. Credit is confidence. 133. A borrower really bor- 
rows wealth, not money. 134. Credit leads to more efficient 



CONTENTS. XV 

PAGE 

production. 135. Book - credit. 136, Bills of exchange. 
137. Banks buy and sell bills. 138. Promissory notes. 139. 
Checks. 140. Checks based on the deposit system. 141. 
Clearing-House. 142. Credit affects prices as well as money. 
143. Prices depend upon both credit and money. 144. The 
extension of credit before a commercial crisis. 145. The 
subtraction of credit in the collapse. 146. The state of de- 
pression. 147. Exercises. 

CHAPTER XV. 

Paper Money 159 

148. Origin of convertible paper money. 149. Definition 
of convertible paper. 150. Legal-tender quality. 151. In- 
convertible paper. 152. Fiat -money. 153. Causes which 
give value to inconvertible paper money. 154. Under 
Gresham's Law, inconvertible paper drives out coin. 155. 
Such paper causes speculation. 156. And causes extrava- 
gance. 157. High paper prices favor debtors. 158. Exercises. 



BOOK IIL 

DISTRIBUTION. 

CHAPTER XVL 

The Problem of Distribution 175 

159. Distribution into interest, wages, and rent. 160. The 
share of the landlord, and the payments for taxes and insur- 
ance. 161. The amount to be distributed described. 162. 
The total value to be distributed may vary. 163. For the 
same capital and labor the value of the product may vary. 

164. The reasons for the great productiveness of an industry. 

165. Why wages and interest may be higher in one country 
than in another. 166. Industries vary as regards the amount 
of labor required. 167. Exercises. 

CHAPTER XVII. 
Interest 182 

168. Interest the share of capital. 169. Insurance for risk. 

170. Insurance to place an industry on the level of safe ones. 

171. The market rate dependent on the rate earned by pro- 
ducers. 172. Manner m which the market rat6 conforms to 



xvi CONTENTS. 

PAGE 

that earned by producers. 173. Principle determining the 
relative shares of labor and capital. 174. Effect of the rate of 
interest on accumulations. 175. Rapidity of circulation of 
capital. 176. Absolute rate of interest varies with the 
value of the product. 177. Why wages and interest are both 
high in new countries. 178. Interest tends to fall. 179, 
Effect of interest on prices of land and securities. 180. Ex- 
ercises. 

CHAPTER XVIII. 

Wages 193 

181. Rear and money wages defined. 182. Standard of 
living. 183. Division of the product between labor and capi- 
tal. 184. Working of this principle of division. 185. More 
hands do not alone produce more wealth. 186, Effect on 
wages of an increase of capital. 187. General law of wages. 
188. Certain actions of labor organizations are at the expense 
of other workmen. 189. Wages in different industries affected 
relatively by reciprocal demand. 190. The share of capital 
relatively to labor tends to decrease. 191. Exercises. 

CHAPTER XIX. 

Wages of Different Classes of Laborers .... 204 
192. Division of the general sum of wages among the va- 
rious classes of laborers. 193. Industrial classes. 194. Num- 
bers diminish as we go upward in the scale. 195. Wages of 
unskilled laborers low, because their numbers are large rela- 
tively to the demand for them. 196. The demand for un- 
skilled laborers. 197. Remedy for low wages. 198. Non-com- 
peting groups of laborers 199. Supply of skilled laborers. 
200. Demand for skilled laborers. 201. Reason for higher 
wages of skilled laborers. 202. Skilled laborers may suffer 
by a withdrawal of demand. 203. Considerations affecting 
wages when the same skill is required. 204. Women's wages. 
205. Exercises. 

CHAPTER XX. 

The Industrial Manager . . . . . . . 222 

206. The manager a necessity of modern industrial con- 
ditions. 207. Large production demands skillful manage- 
ment. 208. The manager not necessarily a capitalist. 209. 
Supply of managers small relatively to the demand for them. 
210. Large "profits" mainly wages of management. 211. 



CONTENTS. xvu 

PAGE 

The conflict not between labor and capital, but between dif- 
ferent classes of laborers. 212. Unusual gains and losses as 
affecting wages. 213. Doctrine of " equivalency of profits " 
emended. 214. Exercises. 

CHAPTER XXL 

Wages and Prices 236 

215. Resume of laws of value. 216. Expenses of produc- 
tion and cost of labor. 217. Cost of labor is the relation of 
the outlay to the return. 218. Efficiency of labor may raise 
both wages and " profits." 219. Under efficiency should be 
included natural resources, machinery, etc. 220. Relation of 
efficiency to prices. 221. Changes of wages in particular in- 
dustries will affect prices. 222. Exercises. 

CHAPTER XXII. 

Rent 244 

223. Rent defined. 224. Rent based on the law of dimin- 
ishing returns. 225. Meaning of superior and inferior soils. 
226. Grain grown on rich and poor soils sold at the same 
price. 227. The law of rent. 228. The law illustrated on 
different grades of land. 229. The law illustrated by suc- 
cessive " doses " of labor and capital on the same land. 230. 
No-rent land, or the " margin of cultivation." 231. Rent esti- 
mated by the surplus above the product on the margin of culti- 
vation. 232. Rent does not increase the price of food. 233. 
Connection of population and improvements with rent. 234. 
Case where the farmer is also the owner. 235. Ground-rent. 
236. The supposition of free competition. 237. Exercises. 



PART II. 
DESCRIPTIVE POLITICAL ECONOMY. 



CHAPTER XXIII. 
Socialism 261 

238. Part II deals with applications of economic principles. 
239. Relation of the state to economics. 240. Essence of 
socialism is the appeal to the state. 241. The state can not 
2 



xviii CONTENTS. 

PAGE 

know the different industrial capacities of individuals. 242. 
Socialism opposed to self-help. 243. Self-help illustrated in 
supplying London with provisions. 244. Interference of the 
state to be restricted so far as possible. 245. The desire of 
socialists to have the state control all capital. 246. Socialistic 
communities within the state. 

CHAPTER XXIV. 

Taxation , . . . 271 

247. Reasons for the existence of taxes. 248. Canons 
of taxation. 249. Direct and indirect taxation. 250. The 
income-tax. 251. Tax on personal property. 252. Rules for 
indirect taxation. 253. Discriminating taxes. 254. Reve- 
nues of the United States. 255. Articles on which the United 
States levies import duties. 256. Criticism on these duties, 

CHAPTER XXV. 

The National Debt ......... 282 

257. Beginning of the national debt. 258. Effects of the 
War of 18 12 and of the Mexican War. 259. In the civil 
war the policy of borrowing was adopted. 260. Kinds of 
obligations issued. 261. The debt in 1865. 262. Refunding 
of the debt. 263. Present form of the debt. 264. Need of 
reducing the surplus revenue. 265. Debts of foreign coun- 
tries. 

CHAPTER XXVI. 

Free Trade and Protection 29c 

266. Protection appeals to the national feeling. 267. 
Free trade based on the gains arising from division of labor. 
268. Protection against foreign competition. 269. Some for= 
eign imports desirable. 270. Protection to infant industries. 

271. The argument that protection does not raise prices. 

272. The tariff" protects the workingmen. 273. Growth of a 
country affected by other things than a tariff". 274, The in- 
dustry abandoned under free trade will be the least pro- 
ductive. 275. Extent of unprotected industries. 276. Pro- 
tection takes from the most productive and adds to the least 
productive industries. 277. Workingmen not protected from 
immigration. 278. Protection gives diversity of industries. 
279. Sacrifice of real for doubtful benefits in adopting protec- 



CONTENTS. xix 

PAGE 

tion. 280. Diversity of industries arises from division of 
labor. 

CHAPTER XXVII. 

Bimetallism , . 303 

281. Monetary questions in the United States. 282. 
Meaning of legal tender. 283. Value of gold and silver af- 
fected by different causes. 284. Gresham's law. 285. Free 
coinage. 286. Act of 1792. 287. Fall in the value of silver. 
288. Act of 1834. 289. Act of 1853. 290. Adoption of the 
single gold standard in 1873-1874. 291. Fall in the value of 
silver. 292. Bland-Allison bill of 1878. 293. Appreciation 
of gold. 294. Causes affecting commodities, not gold. 295. 
International Monetary League. 

CHAPTER XXVIII. 

United States Notes 315 

296. Dislike of paper money in 1789. 297. Treasury notes. 
298. Demand notes of 1861. 299. Arguments for and 
against paper money in 1861. 300. First legal-tender act, 
February, 1862. 301. Suspension of specie payments. 302. 
Second issue, July, 1862. 303. Results of the issues. 304. 
Relation of the depreciation of the United States notes to the 
sale of bonds. 305. United States notes regarded as a tem- 
porary expedient. 306, Evils resulting from their issue. 307. 
The inflation movement. 308. Prohibition of further con- 
traction in 1878, 309. Resumption of specie payments. 

CHAPTER XXIX. 

Banking 328 

310. Convenience of banks for deposit. 311. Liabilities 
and resources of a bank. 312. Capital. 313. How a bank 
makes profit. 314. A deposit a right to draw money. 315. 
Connection between discount and deposit. 316. Cash re- 
serve. 317. The ability to lend depends upon the ratio of 
reserve to deposits. 318. The three functions of banking, 
viz., deposit, discount, and issue. 319. Notes a demand lia- 
bility. 320. Why country banks prefer the issue of notes. 
321, Why city banks make little use of notes. 



XX CONTENTS. 

CHAPTER XXX. page 

The National Banking System 339 

322. Origin of the system. 323. The deposit of bonds. 
324. Provisions for the immediate redemption of notes. 325. 
Means of contracting its issues. 326. Reserves required. 
327. Free banking. 328. No " double profits " received by 
the banks. 329. Performance of its other functions. 

CHAPTER XXXI. 

The Labor Problem 344 

330. Aims of labor organizations. 331. Strikes. 332. In- 
fluence of non-union men on the success of strikes. 333. 
Other causes affecting the success of strikes. 334. Concilia- 
tion and arbitration. 335. The real labor problem a conflict 
of laborers. 336. Saving. 337. Industrial education. 338. 
Christian character. 

CHAPTER XXXII. 

Co OPERATION 350 

339. Forms of co-operation. 340. Advantages of co-opera- 
tive stores. 341. Rules for establishing such stores. 342. 
Successful experiments. 343. Productive co-operation ; its 
difficulties. 344. Examples. 345. Profit-sharing. 346. In- 
fluence on the character of the workmen. 347. Building as- 
sociations. 



INDEX TO CHARTS. 



I. — ^Westward Movement of Population in the Unit- 
ed States 32 



II. — Production of Gcld and Silver 
III. — Occupations of American Laborers . 
IV. — Course of Prices from 1850 to 1885 . 
V. — Exports and Imports of Merchandise from and 



into the United States . 

VI. — The Gold Premium, 1862-1879 . 
VII. — Revenues of the United States 
VIII. — Public Debt of the United States . 

IX. — Ratio of Gold to Silver since 1687 



74 

86 

120 



. 140 
. 163 

Face 274 

" 282 
" 308 



,xxi) 



A TEACHER'S LIBRARY, 

SELECTED FROM 

ENGLISH, FRENCH, AND GERMAN AUTHORS, 



General Treatises. 

John Stuart Mill's " Principles of Political Economy." Abridged, 
with critical, bibliographical, and explanatory notes, and a sketch of 
the History of Political Economy, by J. Laurence Laughlin. A text- 
book for colleges (1884). 

Professor Alfred Marshall's " Principles of Political Economy," 
Vol. I (second edition, i8gi), is the most important recent treatise. 

Professor Fawcett's "Manual of Political Economy" (London, 
sixth edition, 1883) is a brief statement of Mill's book, with additional 
matter on the precious metals, slavery, trades-unions, co-operation, 
local taxation, etc. 

Antoine-Elise Cherbuliez's "Precis de la science ^conomique" 
(Paris, 1862, 2 vols.) follows the same arrangement as Mill, and is con- 
sidered the best treatise on economic science in the French language. 
He is methodical, profound, and clear, and separates pure from applied 
political economy. 

Other excellent books in French are : Courcelle-Seneuil's " Traite 
theorique et pratique d'e'conomie politique " (1858), (Paris, second edi- 
tion, 1867, 2 vols.), and a compendium by Henri Baudrillart, " Manu- 
el d'economie politique " (third edition, 1872). 

Roscher's " Principles of Political Economy" is a good example of 
the German historical method : its notes are crowded with facts ; but 
the English translation (New York, 1878) is badly done. There is an 
excellent translation of it into French by Wolowski. 

A desirable elementary work, " The Economics of Industry " (Lon- 
don, 1879 ; second edition, 188 1), was prepared by Mr. and Mrs. Mar- 
shall. A wholly new edition was issued in 1892. 

Professor Jevons wrote a "Primer of Political Economy" (1878), 
which is a simple, bird's-eye view of the subject in a very narrow com- 
pass. 

Important General Works. 

Adam Smith's " Wealth of Nations " (1776). The edition of Mc- 
Culloch is, perhaps, more serviceable than that of J. E. T. Rogers. 

Ricardo's " Principles of Political Economy and Taxation " (18 17). 

J. S. Mill's " Principles of Political Economy" (2 vols., 1848, sixth 
edition, 1865). 

(xxii) 



A TEACHERS LIBRARY. xxiil 

Schonberg's " Handbuch der politischen Oekonomie " (1882). 
This is a large co-operative treatise by twenty-one writers from the 
historical school. 

Cairnes's "Leading Principles of Political Economy" (1874); 
" Logical Method " (1875), lectures first delivered in Dublin in 1857. 

Carey's " Social Science " (1877), in three volumes. This has been 
abridged in one volume by Kate McKean. 

F. A Walker's "Political Economy " (1883). This author differs 
from other economists, chiefly on wages and questions of distribu- 
tion. 

Treatises on Special Subjects. 

W. T. Thornton's "On Labor" (1869). 

H. George's " Progress and Poverty " (1879). ^^ connection with 
this, read F. A. Walker's " Land and Rent" (1884). 

J. Caird's " Landed Interest " (fourth edition, 1880), treating of 
English land and the food-supply. 

McLeod's "Theory and Practice of Banking" (fifth edition, 

1893). 

Goschen's " Theory of Foreign Exchanges " (eighth edition, 1875). 

A. T. Hadley's " Railroad Transportation " (1885). 

F. W. Taussig's " History of the Present Tariff" (1886). 

W. G. Sumner's " History of Protection in the United States." 

Stebbin's " Protectionist's Manual." 

Erastus B. Bigelow's " The Tariff Question." 

W. G. Sumner's " History of American Currency " (1874). 

John Jay Knox's " United States Notes" (1884). 

Jevons's " Money and the Mechanism of Exchange" (1875). 

J. L. Laughlin's " History of Bimetallism in the United States " 

(1885). 

Tooke and Newmarch's " History of Prices " (1837-1856), m six 

volumes. 

M. Block's " Traite theorique et pratique de statistique " (1878). 

Leroy-Beaulieu's " Traite de la science des finances " (1883). This 
is an extended work, in two volumes, on taxation and finance ; " Essai 
sur la repartition des richesses " (second edition, 1883). 

F. A. Walker's " The Wages Question " (1876) ; " Money" (1878). 

L. Reybaud's " lEtudes sur les reformateurs contemporains, ou so- 
cialistes modernes " (seventh edition, 1864). 

Rae's " Contemporary Socialism " (1884) gives a compendious state- 
ment of the tenets of modern socialists. See, also. R. T. Ely's 
" French and German Socialism " (1883'. 

D. A. Wells's " Our Merchant Marine." 



xxiv A TEACHERS LIBRARY. 

Dictionaries. 

McCuUoch's '* Commercial Dictionary " (new and enlarged edition, 
1882). 

Lalor's "Cyclopaedia of Political ^Science " (i88i-i884)is devoted to 
articles on political science, political economy, and American history. 

Coquelin and Guillaumin's " Dictionnaire de I'economie politique " 
(1851-1853, third edition, 1864), in two large volumes. 

Palgrave's " Dictionary of Political Economy " is the latest. 

(1893-). 

Reports and Statistics. 

The " Compendiums of the Census " for 1840, 1850, i860, and 
1870, are desirable. The volumes of the tenth census (1880) are of 
great value for all questions; as is also F.A.Walker's "Statistical 
Atlas " (1874) ; and Scribner's " Statistical Atlas of the United States," 
based on the census of 1880. 

The United States Bureau of Statistics issues quarterly statements ; 
and annually a report on " Commerce and Navigation," and another 
on the " Internal Commerce of the United States." 

The "Statistical Abstract" is an annual publication, by the same 
department, compact and useful. It dates only from 1878. 

The Director of the Mint issues an annual report dealing with the 
precious metals and the circulation. Its tables are important. 

The Comptroller of the Currency (especially during the adminis- 
tration of J. J. Knox) has given important annual reports upon the 
banking systems of the United States. 

The reports of the Secretary of the Treasury deal with the general 
finances of the United States. These, with the two last mentioned, 
are bound together in the volume of " Finance Reports," but often 
shorn of their tables. 

There are valuable special reports to Congress of commissioners on 
the tariff, shipping, and other subjects, published by the Government. 

The report on the " International Monetary Conference of 1878 " 
contains a vast quantity of material on monetary questions. 

The British parliamentary documents contain several annual "Sta- 
tistical Abstracts " of the greatest value, of which the one relating to 
other European states is peculiarly convenient and useful. These can 
always be purchased at given prices. 

A. R. Spofford's "American Almanac" is an annual of great use- 
fulness. 

A very useful catalogue of the Government publications, entitled 
" United States Publications," is issued by W. H. Lowdermilk & Co., 
Washington. 



PART I. 



PRINCIPLES OF POLITICAL ECONOMY. 



UJ 



INTRODUCTION, 



CHAPTER L 

WEALTH, 

I. Men are constantly laboring to satisfy their wants„ 
The manner in which these wants are supplied is a very 
curious and interesting process. '' Let us take, by way of 
illustration, a man in the humble walks of life — a village 
cabinetmaker, for instance — and observe the various 
services he renders to society, and receives from 
it ; we shall not fail to be struck with the enormous dis- 
proportion between them. This man employs his day's 
labor in planing boards, and making tables and chests 
of drawers. What does he receive from society in ex- 
change for his work? First of all, on getting up in the 
morning, he dresses himself ; but he has himself made 
none of his clothing. In order to put at his disposal 
this clothing, simple as it is, an enormous amount of la- 
bor and many ingenious inventions must have been em- 
ployed. Americans must have produced cotton, Indians 
indigo, Englishmen wool and flax, Brazilians hides ; and 
all these materials must have been transported to various 
towns, where they have been worked up, spun, woven, 
dyed, etc. He sends his son to school, and the simple 
teaching which is given there is itself due to the work 
of many thousand minds. If he undertakes a journey, 

(3) 



4 



IN TROD UCTION. 



he finds that, in order to save him time and exertion, 
other men have removed and leveled up the soil, filled up 
valleys, hewed down mountains, united the banks of rivers, 
and brought the power of steam into subjection to human 
wants. It is impossible not to be struck with the measure- 
less disproportion which exists between the enjoyments 
which this man derives from society and what he could 
obtain by his own unassisted exertions. The social mech- 
anism, then, must be very ingenious and very powerful, 
since it leads to this singular result, that each man, even 
he whose lot is cast in the humblest condition, obtains 
things every day which he could not himself produce in 
many ages."* 

2. Suppose one man weaving baskets and another work- 
ing with a hammer making nails. Each person, by making 
some one thing which other people want, is thus enabled 
to buy with the results of his own work many of other 
men's products which he wants. If one makes baskets 
or nails, which meet the desires of men about him, he is 
producing wealth. We can see, then, that in the wonder- 
ful mechanism of society, men are working to produce 
wealth, and to satisfy one another's material wants. Al? 
the world, so far as they are thus engaged in supplying 
their material wants, are doing things with which Political 
Economy is concerned. If men are occupied with other 
affairs than these, they are not things with which the 
economist is concerned. For example, if I were to row a 
long distance merely to see a ship launched, wealth would 
not result from my exertions. So, also, if I always keep a 
clear conscience, it may be a very desirable thing, but it 
is not an economic fact. A discussion as to whether 
congressmen or the President should appoint to office, is 
also outside of Political Economy. Thus we see that 
Political Economy deals only with questions connected 

* Bastiat's " Harmonies of Political Economy," quoted by Marshall 
in " Economics of Industry," p. i. 



WEALTH. 5 

with wealth and with the satisfaction of material wants. 
It is distinct from morals or from the science of govern- 
ment. Political Economy does not say what is right or 
wrong, or how a people should be governed ; but it at- 
tempts to show what the rules are that control the pro- 
duction, exchange, and distribution of all the wealth which 
we see in the wonderful industrial system about us. It 
will first attempt to explain how all this wealth is pro- 
duced ; then how people who make one thing succeed in 
exchanging it for a variety of other things ; and lastly, and 
most important, how this vast wealth is divided among the 
different persons concerned in its production. 

3. We have already seen that wealth is something which 
satisfies a want, (a) If no one ever wanted a nail, it would 
not be wealth. No one would give anything for a thing 
which he did not want, (b) But air and water satisfy wants. 
Are they wealth ? Is everything which satisfies a want 
wealth.? No; because it is not wealth unless there is some 
sacrifice in getting it. No one would work all day making 
a basket, merely to give it for a pail of water at evening, 
which he could himself get for the taking. So, also, air is 
free to all, and is not wealth. If land or diamonds were 
as plentiful as air or water, they would not be wealth. If 
guns were as abundant as blades of grass, no one would 
economize to get a gun. Consequently, in order to be 
considered wealth, an article must not only satisfy a de- 
sire, but some sacrifice or exertion must be required to get 
it. (c) Then, also, to be wealth, it should be transferable. 
A captured eagle might satisfy some showman's desire, 
and as an eagle is very hard to catch, it would be wealth ; 
but, if it got loose, it would not be wealth to any one. No 
one would give much for an eagle flying away in the sky. 
Material wealth, therefore, is some transferable thing, 
for the enjoyment of which we are willing to undergo a 
sacrifice. 

4. But, according to some writers, not all wealth is ma- 



6 INTRODUCTION. 

ferial. You can see and touch a nail, a basket, a gun, land, 
or diamonds. But this is not true of all things. We may 
work hard at study, in order to gain capacity and mental 
power, which, when attained, will not only make us better 
able to produce, but will also give us pleasure. But can you 
see or touch capacity or mental power .? No. You can only 
know it by its results. Nilsson's power of singing is imma- 
terial, and you can not see it ; yet it enables her to give forth 
songs which delight the world. Is this power wealth.? 
To cultivate this power she has undoubtedly studied and 
labored, and undergone a sacrifice. If we call this wealth, 
it is to be remembered that her labor was spent in accumu- 
lating something which is not material wealth. Of such 
a nature also are skill, intelligence, and all habits, both 
physical and mental, which facilitate production. Thus, 
the skill of a chemist is valuable to a farmer, because it 
enables him to get more from the soil. But it is to be 
kept in mind that immaterial wealth is not capable of 
being transferred from one person to another, so that 
others than the one possessing it can not use and enjoy it. 
A man having great business skill can not part with it in 
such a way as to deprive himself of it, and hand it over to 
a buyer who had none before. Skill can not be trans- 
ferred to a person as a hat or a coat may. One may tell 
others how to get skill, but that is quite different from 
giving it to them. 

5. But most people are engaged, directly or indirectly, 
in collecting material wealth; and, as only such wealth 
can be appropriated and exchanged, we shall be under- 
stood as speaking of material wealth hereafter, unless par- 
ticular mention is made of immaterial wealth. Since ma- 
terial wealth can be passed from one person to another, we 
see that one can have a right of property in it. By this 
I mean one can own it. If you own a gun or a horse, you 
can have the sole use and enjoyment of it, to the exclusion 
of every one else. If you own a house, you can do with it 



WEALTH, y 

what you please ; you can live in it or leave it unoccupied, 
and no one can interfere with you. If a man makes a pair 
of shoes, he is the owner, and the shoes are his property ; 
then, if he sells the shoes for money, the shoes become the 
property of the buyer, while the shoemaker becomes the 
owner of the money he received. Thus, it is seen that 
material wealth can be exchanged, and that the ownership 
can be passed from one to another without changing the 
nature of the article itself or without necessarily destroy- 
ing it. 

6. It is often wrongly supposed, however, that a man's 
wealth is the amount of money he has. We say Mr. A is 
worth ten thousand dollars, but we do not really mean that 
he has money in his hands to that amount. We see that 
he has a lot of land, a house, a barn, horses, or possibly a 
factory. Of course, these articles of wealth can be ex- 
changed for money ; but money is not the only thing 
which satisfies a desire. In fact, the simple money itself 
satisfies very few desires. We are not fed, clothed, and. 
sheltered by money itself. We can not eat money ; we 
can not wear it ; we can not take shelter under it. Money 
is only a tool, an instrument, to aid us in exchanging one 
thing for another. We exchange, for instance, a basket on 
which we have been working all day for a silver dollar, 
and then we buy bread with the dollar ; but, in reality, we 
bought the bread with the basket. Money was only a con- 
venience. Money is like a road or a stairway, which 
allows us to get from one place to another. When we 
desire to go up-stairs to a chamber, we use the stair- 
way to get there ; the stairway itself is not the thing we 
desire. So with money ; we use money only because by 
means of it we obtain the various kinds of wealth we 
want. Gold and silver are wealth, but there are thou- 
sands of other things which are also wealth. Gold and 
silver are not the only things which satisfy our wants. 
Consequently, it is incorrect to suppose that a man's wealth 



8 IN TROD UCTION. 

consists only of the money he has. Money forms but a 
small part of wealth. 

7. Exercises. — i. Let each pupil write out a list 
containing a dozen articles which he may see about him, 
and say of each whether it is wealth or not. 

2. Is land wealth? Does it satisfy a desire ? Is there 
an unlimited quantity of it ? Can land be transferred ? 

3. Is a sled wealth ? Is the snow on which it runs 
wealth ? 

4. Is an ocean steamship wealth ? Is a pleasure-yacht 
wealth ? 

5. Is the man who is building a pleasure-yacht making 
wealth ? Is the man who sails one making wealth ? 

6. A ship went down in the Atlantic Ocean, loaded 
with wheat and flour. Is the cargo at the bottom of the 
ocean wealth ? 

7. There are many fishes in the sea. Are fish wealth.? 

8. Is water ever wealth ? How is it in great cities 1 

9. Is gold wealth to a shipwrecked sailor on a deserted 
rocky island ? Is the gold used to gild a dome of a build- 
ing wealth ? Is a silver spoon wealth ? Does a silver 
spoon satisfy the same want as a silver dollar .? 

10. Try to make a list of the chief articles which form 
the wealth of some person whom you know. 

11. Is the money in the country exactly equal to all 
the wealth ? 

12. Is air in a long railway-tunnel wealth? 

13. Is an article wealth simply because it is scarce? 
How Jibout a mad dog ? 



BOOK I . 



PRODUCTION 



CHAPTER II. 

THE NATURE AND REQUISITES OF PRODUCTION. 

8. That men are getting wealth is only another way 
of saying that men are supplying their wants. Our wants, 
moreover, are various. " A man would not care to have 
many suits of clothes all alike ; he may wish to have sev- 
eral suits, no doubt, but then some should be warmer, 
others thinner ; some for evening dress, others for travel- 
ing, and so on. A library all made of copies of the same 
book would be absurd." * 

Our wants, too, are infinite. No one exists whose wants 
are all satisfied. The greater our intelligence, the more 
are our wants. The uncultivated and ignorant care little 
for the best pictures or for the best books. The wants of 
a Zulu savage are much fewer than those of Mr. Glad- 
stone. As society progresses, wants of a higher kind mul- 
tiply. There is never more wealth in a country than peo- 
ple care for ; there can never be too much wealth, because 
wealth is that which satisfies some want, and our wants 
are unlimited. 

Since our wants are various, it follows that, after we 
have all we desire of one thing, it would be useless to 
produce more of it ; but, if our wants are unlimited, there 
must be some things that we want which we do not have. 
Consequently, in speaking of production, we shall under- 
stand by it the production of those things which peo- 

* Jevons's " Primer of Political Economy," p. 17. 



12 PRODUCTION. 

pie want, and only in such quantities as are sufficient to 
meet those wants. No carpet-maker is so foolish as to 
make all the carpets he possibly can, for he knows that 
people need only a certain number of them. If he is so 
foolish, he suffers for his own blunder. 

9. People do not produce for the pleasure of pro- 
ducing. Labor is hard and wearisome. One man wants 
food for his family, and so he sets to work to produce 
some of the things which the world wants, by which he 
can acquire the food he desires. He may be unable to 
produce the food himself, and so produces, say, a basket. 
He then exchanges the basket with a farmer for food. But 
it is plain that another person is necessary to this ex- 
change — namely, the farmer. He also produced a por- 
tion of his crops in order to satisfy his desires, one of 
which was for a basket. In other words, for every proper 
act of production and exchange, a pair of producers 
working reciprocally is necessary. So that, in order that 
production should be properly adjusted, whenever A pro- 
duces for B, B should be producing for A ; and A must 
know what B wants, and B must know what A wants, if 
each would produce to a purpose, and serve the objects 
each had in view in working. Here we get the idea of a 
market. The fact that A can not find a market for his 
basket, shows that there is no one who, while able to pro- 
duce what A wishes in exchange for his basket, also has a 
desire for a basket. In this case, there is no spring to ex- 
ertion inipeinng B to produce what A wants. The busi- 
ness community form the machinery by which the actual 
desires of A are known to B, and vice versa. That is, busi- 
ness men are almost entirely engaged in studying how much 
people want of cottons, woolens, sugar, coffee, etc. They 
call it " studying the demand " ; but this demand depends 
on whether other people are producing things to offer for 
the cottons, woolens, sugar, and coffee. A great city mar- 
ket, in which millions of goods are exchanged, depends 



NATURE AND REQUISITES OF PRODUCTION. 13 

upon the existence of numberless pairs of producers, one 
member of each pair working for the other member, and 
vice versa. There is never any danger of producing too 
much, but business men may not always find out the ex- 
act desire of each member of a productive pair, and thus 
enable the products of each to be properly adjusted to 
the other's wants. This is ill-adjusted production. 
So we see that, to be effective, production in modern 
times is generally reciprocal. To be sure, a hunter pro- 
cures his own food, etc., but in these days primitive con- 
ditions are hardly to be considered. 

Business men, of course, know more than others about 
the facts of the market in their own branch of industry; 
but they are often ignorant of the laws governing the pro- 
duction, exchange, and distribution of their own prod- 
ucts. 

10. In order to understand how each person may en- 
gage in production, and get that which satisfies his wants, 
it will be necessary to examine the requisites of pro- 
duction. It will be found that, to produce wealth in a 
continuous way, as we see it done all around us, three 
things are required : 

1. Land, or natural resources. 

2. Labor. 

3. Capital. 

If we reflect a moment about the production of any- 
thing we see about us, which we call wealth, we shall find 
that all these three factors enter into its making. 

11. Land, or Natural Resources.— No single ar- 
ticle of wealth is produced for which something is not 
taken from Nature, either in the form of materials or of 
forces. Take a coat, for example. " In the first place, 
sheep had to be reared, pastured, and sheared, in order 
that the wool necessary for the coat should be obtained. 
The breeding of the sheep required a considerable ex- 
panse of land on some Western prairie or in the interior 



14 PRODUCTION. 

of Australia. It is obvious that without land there could 
be no grass, and therefore no wool. Now, land in its orig- 
inal state is a gift of Nature, which men can not make at 
all. In the further process of manufacture, a factory had 
to be erected, and machinery of brass and iron employed. 
A particular kind of earth was necessary to make the 
bricks out of which the factory was built, and the iron had 
to be extracted from iron- ore. Both these materials had 
to be taken out of the earth, and their ownership is asso- 
ciated with that of land. If the machinery was run by 
water-power, a river was necessary ; if by steam-power, 
coal had to be dug from the earth to make the fires which 
produced the steam." * 

Not merely materials, but also forces, are supplied 
by Nature. A ship may be propelled all the way from 
Liverpool to New York by the force of the wind alone. 
If it were not for the buoyant force of the water, the 
ship would sink to the bottom. Man "moves a seed into 
the ground, and the natural forces of vegetation produce 
in succession a root, a stem, leaves, flowers, and fruit. He 
moves a spark to fuel, and it ignites, and, by the force 
generated in combustion, it cooks the food, melts or softens 
the iron." f 

12. Labor. — No matter how rich the soil, how luxuri- 
ant the grass, how fine the climate, how plentiful the iron, 
the coal, and the manifold resources of Nature, wealth can 
not be produced unless human labor performs its part. 
Pittsburg now produces vast quantities of coal and iron 
every day; but only one hundred years ago the Indians 
applied no labor to these rich gifts of Nature, and such 
things were never produced there. " A man would perish 
in the most fertile spot if he did not take some trouble in 
appropriating the things around him. Fruit growing wild 
on the trees must be plucked before it becomes wealth, 

* Newcomb's " Principles of Political Economy," p. 70. 

f Mill's " Principles of Political Economy," Book I, chap. i. 



NATURE AND REQUISITES OF PRODUCTION. 15 

and wild game must be caught before it can be cooked 
and eaten/' * 

13. Capital. — In order to carry on production con- 
tinuously, in these days, a man must have the use of some 
wealth while he is engaged in working. If he is making 
screws, he can not live on them ; he must have food until 
the screws are made and exchanged for other things. If, 
as soon as he became hungry, he had to stop work, take 
his dog and gun, and hunt for some game, it would greatly 
interfere with steady work. So, also, other wealth must 
be given him to use while he is at work — for instance, 
tools, machinery, and buildings. Prof. Jevons says there 
is a good Japanese maxim — " Dig a well before you are 
thirsty." So a man must have ready for him when he 
begins to work all the appliances furnished by ingenious 
and curious machinery, and even buildings and steam- 
power. Some one must be willing to furnish these things 
for him, if he does not have them himself. Capital is that 
part of wealth devoted to producing other wealth, 

14. Exercises. — i. Why does a shoemaker work all 
day long repairing shoes for other persons ? How does 
he get his food ? Can he live on shoes 1 

2. Because a shoemaker works on a shoe all day, does 
he care for but that one thing ? Mention some of the 
things he probably gets by exchanging his shoes with 
others. 

3. Would the poems of Shakespeare command a high 
price among the Zulus ? Would a work of Michael An- 
gelo buy as much corn in Central Africa as in the United 
States ? 

4. If all the various manufacturers of the United States 
were to turn with all their means to producing cotton cloth 
only, would there be people who would give their wealth 
for all the cloth produced .? Would there be a " market " 
for all the cloth ? 

* Jevons's " Primer of Political Economy," p. 26, 



l6 PRODUCTION. 

5. A farmer gives money for some calico ; how did he 
probably get the money ? If he had had nothing to sell 
for money, would he have had anything with which to buy 
the calico ? 

6. If every person who owns land were to produce beets 
only, would a market be found for all the beets ? Do 
people care for nothing but beets to eat ? Would all other 
persons work and make things to exchange for beets only 
if they could induce some land-owners to produce corn or 
wheat for the things they offered ? 

7. Can you get along, in making anything, without using 
land ? Does not a fisherman, if he stays on the water ? 
Whence come his vessel, his fish-hooks, his fish-lines ? 

8. Wild strawberries are wealth in some places. Can 
they be gathered without labor ? 

9. It is very attractive to watch a cotton-mill in oper- 
ation, or see melted iron poured into molds in a foundry. 
Why can not every man have a cotton-mill or a foundryj, 
if he wish ? What is required to pay the laborers each 
week ? Could a man himself use that which he has already 
given away to laborers for wages ? 



CHAPTER III. 

DIMINISHING RETURNS FROM NATURAL AGENTS. 

15. Under natural agents are included not merely 
land, but minerals under the surface, water-power, and 
similar gifts of Nature. The wealth of a country depends 
largely on the natural resources of its climate, soil, and 
mines. The rugged mountains which run southwest from 
Pennsylvania to Alabama are nearly useless for cultivation, 
but they abound in coal and iron and limestone ; while 
new prairie lands, where there are no mines, yield grain 
with little exertion. Then the nearness of mines of coal 
and iron to rivers or to the sea adds greatly to their ca- 
pacity for producing wealth. " England's present position 
in the world is in a great measure due to the fact that she 
not only has coal-mines and iron-mines, but also her coal 
and iron mines are near together." * In the United States, 
the Mississippi, the Ohio, and the St. Lawrence, and the 
Great Lakes, are means of producing goods more cheaply, 
since it is part of production to transport goods to a place 
where they are wanted. 

The raw materials of every industry come from the soil 
in one form or another. A lead-pencil gets its covering 
of wood from the cedar-forests, its black-lead from mines, 
and its paint from lead ground with oil made from flax- 
seed. But, generally speaking, the greatest source of all 
products is land, for almost everything comes from the 

* Marshall, " Economics of Industry," p. g. 

(X7) 



1 8 PRODUCTION, 

land. Therefore, we shall speak mainly of land in dis- 
cussing natural agents, and use it as representing a class 
of things. 

16. In order to learn how more wealth can be pro- 
duced, so that the world may become richer, we must seek 
the rules according to which each of the requisites of pro- 
duction permits such an increase. Unless we consider 
how each factor can increase, we can not know how great 
the expansion of wealth may be. Our aim, then, shall be 
to study the increase of production from land ; next, the 
increase of labor, that is, population ; and, lastly, the in- 
crease of capital. In this chapter we shall consider only 
the principle according to which land yields its products, 
or, as It is called, the law of diminishing returns. 

17. The supply of air or water is practically unlimited 
Is it so of land ? We know that on this globe there can 
be no more farms than would cover the fifty-one mill- 
ions of square miles, which is the area of the continents 
and islands. This is a limited amount. The frugal and 
thrifty Dutch may sometimes reclaim a few acres from 
the sea by dikes ; but men can not create land. The 
best we can do is to discover and open up lands which are 
unknown ; and that process is going on in Africa, although 
even there we find people already using the land. Much 
land, such as the bald and rocky sides of the Appalachian 
and Rocky Mountains, can never be used for cultivation; 
and, of that which can be cultivated, not all is equally 
good for such things as people want for food. We can 
not well grow cotton and sugar in New York, nor wheat 
in Mississippi. The best land in any region, at all fitted 
for the cultivation of a particular crop, is of small extent, 
for a large part of the territory is always but indifferently 
adapted to the cultivation of a variety of products. 

18. Just as every person is different from every other, 
so no piece of land is exactly like another in soil and fer- 
tility : one is high and dry, another is low and wet ; one is 



NATURAL AGENTS. 



^9 



clayey, another is sandy; one is thin in soil, another is rich 
in deep loam. All fields in a farm, moreover, are not 
equally fitted for the same grain. Thus we find, for in- 
stance, that different States in the Union are in different 
degrees adapted for the wheat-culture. The thin, stony soil 
of New England can not compare with the rich prairies 
of Minnesota and Dakota in growing wheat. But we do 
not need to go beyond the nearest farm to discover that 
lands vary exceedingly in the amount which they can 
produce of given kinds of grains or vegetables. 

19. Now, how can more food be got for our rapidly 
increasing population } If we were farmers, we should 
take into cultivation at first that land which now yields, 
for the least outlay, the greatest number of bushels of 
wheat, or oats, or corn, or potatoes. In some new lands 
the more the labor and the more the capital spent, the 
greater the product ; but this will not be always true. 
After a certain point is reached in the cultivation 
of every piece of land, it is found that, doubling 
the laborers and doubling the capital put upon the 
land will not double the number of bushels which 
the land will yield. This is the law of diminishing 
returns. It is simply a physical fact ; that is, it is a fact 
which Nature has disclosed to us, just as we say it is a 
fact that water runs down hill. 

In order to understand this C 

more clearly, let us refer to the 
accompanying diagram. Imag- 
ine that we are just beginning 
to work a little farm in the thin- 
ly settled parts of Dakota. With 
one laborer and $50 of capital 
(in the form of a plow and seed), 

only 10 bushels of wheat can be obtained, represented by 
AR. Of course, if more labor were to be had, more care 
could be taken ; and, if more capital were in hand, better 



R S T U V X Y 



20 PRODUCTION. 

fencing, tools, etc., could be used. So, if another laborer 
and $50 more of capital be applied to the same piece 
of land, the two men can so aid each other, and the 
better instruments will be so effective, that 12 bushels 
more can be produced, represented by BS. Thus we 
should have 22 bushels, by doubling the men and capi- 
tal. It is even possible that another " dose of labor and 
capital" — that is, another laborer and another $50 — 
might be so effective that 15 bushels more could be pro- 
duced than before, represented by CT. The three labor- 
ers, with $150 of capital, might then produce 37 bushels, or 
AR + BS + CT. To this point, there has been an increas- 
ing return for every new "dose of labor and capital." But 
here the tide changes from an increasing to a diminishing 
return. If more food is wanted, and there is no other 
land to take, it must be had by spending more labor and 
capital on the same land. We can plow more deeply, or 
supply more fertilizers, but an additional fourth laborer, 
with additional capital of $50, will not cause as great an 
increase as before. More will be produced, but not in 
the same ratio to the outlay as before ; in this case, per- 
haps, only 14 bushels — in all, 51 bushels, or AR + BS + 
CT + DU. From this time on, additional produce (if 
the conditions remain the same) can be had from the 
same piece of land, but only with increasing difficulty. 
As John Stuart Mill* has said, it is like stretching a rub- 
ber band — the more you wish to stretch it, the more force 
you must apply. That is, after CT is reached, new labor- 
ers and new capital will yield more, but in a diminishing 
ratio to the labor and capital applied. EV, FX, GY will 
be successively less. 

20. There is scarcely a piece of land anywhere which 
would not yield more if new laborers were put to work 
draining the soil, hauling manure, or applying guano or 

* •' Principles of Political Economy," Book I, chap, xii, § 2. 



NATURAL AGENTS. 21 

expensive fertilizers ; but the farmer always asks whether 
this new labor and this additional capital will produce 
so much more than before as to give him a reasonable 
profit. Some writers have, however, denied the law of 
diminishing returns. They think that, as the number 
of laborers is increased and as more capital is applied, 
land will constantly yield more and more. If this 
is so, why would not one farm do for all the United 
States ? If labor and capital can increase the product 
without limit, then why not make additional applications 
to the same farm, and produce enough for all the United 
States from it ? Now, no one believes that this can be 
done. It is not profitable to employ more than a certain 
amount of labor and capital on a crop of oats or wheat, 
because an excessive amount would be wasted without 
producing more oats or wheat. As soon as the popula- 
tion in a country becomes dense, it may be taken for 
granted that the return made to capital by land diminishes, 
unless something occurs to counteract it. 

21. The law applies in a similar way to mines. 
The increase of production from mines is attended with an 
increasing outlay. The best mine may have its coal near 
the surface, and so it may cost little to carry it to the mar- 
ket; but, as more is mined, deeper shafts must be dug, 
longer galleries must be made right and left, more power 
will be needed to raise the coal the longer distance, and 
more expensive machinery will be required to lift the prod- 
uct as well as to provide air and pump water out of the 
mine. So that, in order to bring a ton of coal to the sur- 
face, it costs more, as more coal is required. But, of 
course, it is to be remembered that improvements in ma- 
chinery can in a most marked way counteract the tend- 
ency toward a diminishing return from mines, or the natu- 
ral tendency of the product to cost more. It is also to 
be observed that the richest mines may be completely ex- 
hausted, and so the poorer mines on the less productive 



22 PRODUCTION. 

strata will then be taken up. In this way, the return to 
capital and labor becomes less, but not in the same regu- 
lar way as in the case of land. 

22. In considering the productiveness of land to-day 
as compared with that of five hundred years ago, or even 
a hundred years ago, we find that the same land is made 
to yield more now than then. Why is this .'' Because we 
have the experience of all our ancestors, the accumulated 
skill of the world, better knowledge of the soil, and of 
manures and fertilizers. Where men used to reap their 
grain with cradles (a scythe with a frame attached), they 
now use machines which, as they are driven along, cut 
and bind the grain ; and, instead of the flail for threshing 
it out on the barn-floor, there is now the familiar thresh- 
ing-machine. ''Sulky plows," drawn by horses, do more 
work than the old plow, followed by the man in the fur- 
row. Horse-rakes do the work of many men. More than 
this, the cost of sending wheat and corn by railways has 
been lessened.* So we see that there are many improve- 
ments constantly tending to counteract the law of 
diminishing returns from land. Whether the original 
tendency is the stronger, or the counteracting forces are 
the stronger, depends upon particular circumstances in 
each country. In the United States the progress of im- 
provements is very striking. We have, moreover, scarcely 
taken up all our best lands as yet. 

" From similar considerations, it appears that many 
purely mechanical improvements, which have, apparently 
at least, no peculiar connection with agriculture, neverthe- 
less enable a given amount of food to be obtained with a 
smaller expenditure of labor. A great improvement in 

* In 1855 it cost 3.27 cents on an average in the State of New York 
to carry one ton one mile ; now it costs only between .80 and .90 of a 
cent. If the people of New York had paid the charges of 1855 for the 
goods carried in 1883 (9,286,216,628 tons, one mile), it would have cost 
them over $220,000,000 more than it actually did. 



NATURAL AGENTS. 



23 



the process of smelting iron would tend to cheapen agri- 
cultural implements, diminish the cost of railroads, of 
wagons and carts, ships, and perhaps buildings, . . . and 
would thence diminish the cost of production of food. . . . 
The first application of wind or water power to grind corn 
tended to cheapen bread as much as a very important dis- 
covery of agriculture would have done, and any great im- 
provement in the construction of corn-mills would have, 
in proportion, a similar influence." * 

23. Exercises.— I. Along the coast of Maine the lob- 
ster-fishery has almost ceased, because of the exhaustion 
of the supply. Is there any law of diminishing returns 
which affects the produce of this kind of food ? 

2. In a pair of shoes, study out the materials which 
enter into its manufacture of which it can be said that 
their production is affected by the law of diminishing re- 
turns. 

3. Our pine-forests are constantly being destroyed, as 
in Maine, in the Adirondacks, and in the districts about 
the Great Lakes. Does the same labor and capital get out 
as much lumber as before, when forests were more acces- 
sible ? If lumbermen must go farther away from the rivers 
and coasts, haul their logs in winter farther to the streams, 
take more time in floating the logs down to the mills in 
the spring, would it require more labor and capital to get 
out the same quantity of lumber than before ? Does the 
law of diminishing returns apply to lumber } 

4. When trout-brooks become exhausted near the 
haunts of men, and no trout can be found except in dis- 
tant and remote streams, by long journeys and great skill, 
does the law of diminishing returns apply to such fish- 
eries ? 

5. In a coal-mine where mules are used to haul out the 
cars full of coal, when the shaft becomes a quarter of a 

* Mill's, " Principles of Political Economy," Book I, chao. xii. § 3. 



24 PRODUCTION. 

mile long, will more mules be required to bring the same 
number of cars to the mouth than when the shaft was 
only half as long? Does this show an increased cost to 
the mine-owner ? Does his coal cost him more than be- 
fore ? 

6. Three tons to an acre is a very good yield of hay. 
Has any land ever been heard of where thirty tons an acre 
can be produced, or three hundred tons ? Why not ? 

7. If a farmer should discover a new and cheap way 
of getting excellent fertilizers for his land, would that 
operate against the law of diminishing returns ? 



CHAPTER IV. 

LABOR AND ITS INCREASE. 

24. There is a very ingenious machine, only, perhaps, 
two feet square, used in making screws. It takes out of 
a hopper the pieces of the proper length cut off from a 
rod of steel, and arranges them in a row. An iron beak, 
like that of a crane, then reaches out, takes one piece at 
a time, and places it in a vise, where the head and the 
thread are cut in a moment. It is very clever and won- 
derful, simply because man's forces are combined with 
Nature's forces. Men can produce more when they work 
in connection with the forces of Nature. Men are con- 
stantly learning how to get Nature's forces to do work 
for them, as in the windmill or by water-wheels. Every 
year, as new machinery is invented, work is being trans- 
ferred from man to some combination of the forces of 
Nature. Not many years ago most of the boots and shoes 
we wore were made by hand ; now, as a lady enters a shoe- 
factory, she can see the leather for a shoe cut, sewed, 
soled, and finished by machinery while she makes a short 
visit. More wealth can be produced in our country if 
man's forces work more perfectly with Nature's forces. 

25. We often make great mistakes in talking about la- 
borers. Who compose the laboring class 7 Are the hod- 
carrier and the man with a pick and shovel included in this 
class ? Certainly. Shall we include, also, the skilled arti- 
san, who forms, fits, and polishes the steam-engine in a 

4 fag) 



26 PRODUCTION, 

great factory which runs so smoothly that there is no noise 
but that of the wind caused by the great wheel ? Cer- 
tainly. Shall we include the man who sits at a desk all 
day designing engines, studying plans for the artisans to 
work upon ? Certainly. Shall we include the man who 
sits a while in the office ? He is engaged in consulting 
the designer, accepting or rejecting his plans, telling the 
men where to work, and in deciding whether an addition 
shall be built for more workmen or not. We see him 
running out to borrow the capital at the bank with which 
to build the addition ; coming back to send a letter to 
Sweden for a particular kind of iron, and deciding how 
he can buy it in the best way and how much to pay ; 
then sending an agent to the Cape of Good Hope to see 
if his engines can not be sold there, and he be enabled 
to employ more men ; watching so that the men can have 
uninterrupted work ; preventing waste ; learning to whom 
he can sell his engines, and yet not be cheated ; study- 
ing how best to protect the buildings from fire ? Certain- 
ly this man is a laborer. Because one labors only with 
his hands, is he alone to be included in the honorable 
class of laborers ? Certainly not. We must conclude that 
not all labor is physical, done with hands or with muscle. 
We can not look in any direction without noticing that 
many laborers are working with their heads, and that la- 
bor is mental as well as physical. A schoolmaster 
is not less a laborer because he does not use his hands. 
He is paid wages for mental work just as a hod-carrier 
is paid wages for physical work. Yet, if a man is well 
dressed and very intelligent, if he does agreeable work, or 
mental work in-doors, many people are apt to think wrong- 
ly that he is not to be classed as a laborer. We shall 
soon find that no such distinction can be drawn in politi- 
cal economy. All labor, mental and physical, is to be 
treated alike. 

26. In fact, physical, mental, and moral qualities all 



LABOR AND ITS INCREASE. 27 

affect the amount of wealth produced by any laborer. 
Strong and healthy parents are likely to give a laborer 
physical vigor ; and many qualities, both good and bad, 
come to him by inheritance ; but each man can improve 
his physical power by regularity of living, wisdom in his 
diet, by habits of cleanliness, or by observing sanitary rules. 
In the temperate climates men work with best success, 
where the heat is not enervating, and where their ener- 
gies are not sapped by malarious diseases. As medical 
skill increases, life is prolonged, and the longer a man 
lives, the more he can produce. Some races, moreover, 
are much more hardy and muscular than others ; the 
American laborer, for instance, is vastly superior to the 
Mexican, who works for from ten to fifty cents a day. 

27. The mental power of any laborer, however, is 
of peculiar importance to his productive capacity. An 
increase of intelligence results in an increase in the power 
to produce, and raises the laborer who possesses it in the 
scale of comfort. *' Clearness of mind, quickness of appre- 
hension, strength of memory, and the power of consecutive 
thought," which come from mental training, make the dif- 
ference between a desirable and an undesirable laborer, 
and enable the former soon to pass into more remunerative 
work than the latter. General Walker says : '' The intelli- 
gent is more useful than the unintelligent laborer, (a) Be- 
cause he requires a far shorter apprenticeship ; he can learn 
his trade in a half, a third, or a quarter the time which the 
other requires, (b) Because he can do his work with little 
or no superintendence ; he is able to carry instructions in 
his mind, and to apply them with discretion to the varying 
conditions of his work, (c) Because he is less wasteful of 
materials. In some branches of manufacture the value of 
the materials used is equal to the amount paid in wages. 
(d) Because he readily learns to use machinery, however 
delicate or intricate. Brains are not alone required for 
the invention of machines ; they are required for their 



28 PRODUCTION. 

adjustment, their ordinary use, and their occasional re- 
pair." * Moreover, any education, which not only gives 
mental alertness but technical skill, is a great gain to the 
laborer. He thereby learns the principles according to 
which machinery is run, as well as the nature of its opera- 
tions. He gains the means of easily adapting himself to 
new machinery, because he understands the underlying 
principles, and by practice he attains earlier in life that 
deftness and dexterity with his fingers which often so 
amaze a visitor in manufacturing establishments. I have 
seen a woman tying up packages and labeling them so rap- 
idly that my eyes could not follow each operation. 

28. The moral qualities of self-respect, prudence, 
self-control, cheerfulness, and will-power have no small 
influence on the quantity of wealth produced. An hon- 
est, upright character has a distinct money-value to every 
laborer. These are the things which permit a man to 
rise in the scale of laborers. The chance to improve his 
social position will add to his self-respect and his pride 
in good work. His prudence will teach him steadiness 
and persistence ; his self-control will master the difficul- 
ties of his work, and keep the desired end in view through 
the dull monotony of labor. The laborer, moreover, who 
is working in such a way that he shares in the results of 
his own work, will have a peculiar energy and efficiency. 
When a man is working for himself, he works in a differ- 
ent way than when he works for another and has no share 
in the result. He has an incentive to become industrious, 
and is willing and eager to work early and late. 

29. Since labor is so important to production, in order 
to learn how wealth can be increased, we must discover 
the law of the increase of laborers. We have seen in 
the last chapter that land gives a diminishing return to 
new applications of labor and capital, or that subsistence 



* <■<■ 



Political Economy," pp. 52, 53. 



LABOR AND ITS INCREASE. 



29 



can not be doubled by doubling the labor and capital. 
In regard to the law of the increase of human labor, we 
find that the conditions are very different. Its power of 
increase is marvelously great, even if it is not always used. 
If each family has four children, population will double 
in every generation ; and, as each generation can double 
itself, the rate of increase is in a geometrical ratio. This 
is a physiological fact. The power of population to in- 
crease is unlimited, but the actual growth is never what 
it might be. If the growth of population should receive 
no check, the world would in time provide only standing- 
room for each person. The tendency of population 
to increase is far greater than the power of sub- 
sistence from land to increase. But there are forces 
which oppose this tendency, and keep down the growth 
of numbers. The actual growth of population is like the 
movement of a block on a floor when acted on by two 
opposing forces, A and B. A presses on the block, and 
tends to move it to the right ; while B tends, at the same 
moment, to push it in exactly the opposite direction. If 
A is stronger than B, 
the block will move to 
the right, although B 
is operating against A 
all the while ; but it 

does not stop A, it only counteracts A's power. So it is 
with the tendency to increase population and its checks. 
The tendency, like A, is always acting, and its movement 
is restrained by the counteracting checks, like B, which 
may be either equal to or less in force than A. 

30. Uncivilized, thoughtless, or ignorant people often 
marry without thinking whether they will be able to 
feed and educate their children properly. Among such 
reckless people, who have no thought of the future, no 
prudence, no forethought, children are insufficiently fed 
and cared for ; some are even allowed to die purposely ; 




30 PRODUCTION. 

some die of disease and want. Among savages, many are 
killed in war. In this way, the tendency of population to 
grow is restrained by the positive check. Even among 
modern nations, and in our own great cities, the number 
of children among the very poor who die in the hot sum- 
mer months is, it is sad to say, very large. " Insufficient 
food and clothing, neglect, dirt, foul air, and infectious 
diseases hurry off vast numbers of the children of the 
poorer laborers in town and country to an early grave," 
says Prof. Marshall, of England. It is among the hopeless 
poor that the reckless increase of families is the greatest, 
though it should be the least. It is so in Ireland. 

But, among civilized, intelligent, and self-contained 
people, marriages are not made unless sufficient means to 
care for a family are at hand. They postpone marriage 
until they have saved a proper sum. This moral re- 
straint, or negative check, is strongest as we rise in the 
social scale to the classes of people who are intelligent and 
prudent, but who have limited means. They generally 
succeed in giving their children a better education than 
they had themselves. In the United States, families of 
American birth are usually found in this class. Mr. Mal- 
thus (who laid down the foregoing law and its checks, and 
after whom it is called the Malthusian law) found in Switzer- 
land that the difficulty of finding houses and employment 
caused many persons to remain unmarried. It is also a 
well-known statistical fact that there is a smaller number 
of marriages in our country when business is depressed 
than when it is prosperous. 

31. Since the undesirable classes are those on whom 
a regard for the future seems to have no influence, it is 
particularly unfortunate that these people should furnish 
the greater proportion of the increase of population, while 
the judicious, thrifty, thoughtful, and intelligent classes, 
who have more thought for the future, should furnish the 
less proportion. It is not among the intelligent people 



Labor and its increase. 



31 



of the community, with limited means, who are yet provi- 
dent, that it is desirable to point out any more strongly 
the gains from a check upon increase of numbers ; it is 
rather among the most miserable that large families should 
be discouraged, because they are doing harm to the state 
by turning children into the streets without oversight, to run 
into places where they become familiar with evil, and are 
taught to become criminals in order to get a livelihood, or 
even to satisfy the cravings of hunger. It is a very seri- 
ous problem to learn how to infuse into these helpless, 
hopeless persons a sense of self-respect, prudence, and 
foresight which should keep them from aimless increase of 
numbers. If it is believed that the number of persons 
who belong to the lowest stratum in society are too numer- 
ous to earn much so long as they have no trade, and can 
do unskilled work only, and if a still further increase in 
numbers would make all worse off than before, then cer- 
tainly those who advise moral restraint on the growth of 
this class of persons, in order that they may be saved from 
that which produces vice and misery, can not be called 
"hard-hearted," or *' un-Christian," or "dismal Malthusi- 
ans." They are rather the true friends of the unfortunate 
people, who need real, not sentimental and misdirected, 
kindness and help. It has never been suggested that peo- 
\ le already in existence should be cruelly treated or left 
to starve in order that a smaller number should exist and 
competition be decreased. 

32. When the standard of living is raised, it usually 
results in an increase of population. By standard of 
living I mean the average amount of necessaries, decen- 
cies, and comforts enjoyed by each class; the kind of 
rooms they live in, the amount and quality of food and 
clothing, and the little comforts, like carpets and pictures, 
that they can enjoy. If wages are high, laborers will al- 
ways have more than the mere necessaries. This is espe- 
cially true of the majority of laborers in the United States, 



32 



PRODUCTION. 



and consequently population in this country increases very 
fast. In 1800 we had only 5,000,000 of people, and now 

we must have at least 
65,000,000, Chart I 
shows by the movement 
of the center of popula- 
tion how rapidly the 
wave of increasing num- 
bers has moved west- 
ward. In about ninety 
years our numbers have 
increased thirteen times, 
an unprecedented occur- 
rence. In France, where 
wages are much lower, 
there is scarcely any in- 
crease at all. Soon, when 
our unoccupied land is 
all gone, it will not be 
possible for us to in- 
crease in numbers so 
fast, and yet remain, each 
of us, as well off as we 
are now. Even now we 
are beginning to object 
to the coming of Chinese 
and Italians and Hunga- 
rians, because they make 
it more difficult to get 
work. The '' standard of 
living " of these new- 
comers is less than our 
laborers have been ac- 
customed to, and these 
latter do not want to lower the standard which has hither- 
to prevailed in the United States, But it will probably 




LABOR AND ITS INCREASE. 



33 



be lowered by the natural increase of our present popu- 
lation, even if we pass laws to keep some foreigners out. 

33. All laborers are not equally employed in a way to 
produce the most wealth. Some persons labor but do not 
produce any wealth, and so they are called unproduc- 
tive laborers. Those who produce wealth are 
called productive laborers. In order to decide whether 
a man is a productive laborer or not, first settle whether 
what he is making is wealth or not. A farmer is a produc- 
tive laborer when he raises corn, because corn is wealth. 
The corn may be accidentally burned up, but the farmer 
who produced it was, all the same, a productive laborer, 
because the corn was wealth as long as it existed. The 
tailor who makes a coat is a productive laborer, because 
a coat is wealth. It makes no difference in this distinction 
whether the coat, after it is made, is worn by a laborer or 
an idler ; of course, if used by a laborer, while it is wear- 
ing out, other wealth is reproduced in its place ; or if the 
coat is worn out by an idler, the tailor who made it pro- 
duced wealth. The tailor and the idler should not be 
confused. Often we can not decide certainly whether a 
laborer is productive or unproductive. A policeman is 
necessary to protect property, and so enable wealth to be 
produced. In this sense he is a productive laborer. But, 
if he does not do his duty, and wealth is destroyed through 
his negligence, he is not a productive laborer. So a cler- 
gyman may not directly produce anything ; but if, as a 
fact, he ever turns a man from bad habits to good, so that 
the man becomes a productive laborer, the clergyman aids 
in production. Sometimes he is productive and some- 
times not. 

34. Exercises. — i. When men first contrived a sail- 
boat, were they able to accomplish more work by using 
Nature's forces ? Explain how. When steam was first 
used to draw a train of cars, was the same kind of gain 
attained ? 



34 PRODUCTION. 

2. Give a list of the kinds of labor done in some fac- 
tory you know about. Which of them are performed by 
persons whom you would include in the laboring class ? 

3. The president of a New York mutual life-insurance 
company is paid (as is reported) thirty thousand dollars a 
year. Is he a laborer ? Does he employ his mental and 
moral faculties to do something for which he gets that 
which satisfies his own wants ? 

4. Is the errand-boy in this insurance company any 
less a laborer because he uses his feet while the president 
uses his head and conscience ? Is he only a laborer who 
does physical work ? 

5. Does this errand-boy use his body only ? Do the 
moral qualities, like honesty, or the mental qualities, like 
brightness, help him any ? 

6. Have you ever seen a ship in a good wind sailing 
slowly but majestically up stream against the tide ? Be- 
cause she makes headway against the tide, is that any 
reason why there is no tide ? So, if population always in- 
creases, is that any reason why there are no checks operat- 
ing to keep down numbers ? Does that show that there 
would be no greater increase if there were no checks.? 
Would the ship go faster if the tide were not against 
her? 

7. Why does population increase so rapidly in the 
United States? Why is it that the checks which keep 
population down do not have much force ? 

8. In Mexico the laborers are very lazy, shiftless, and 
ignorant, and their wages are about fifty cents a day. If 
their wages were doubled, is it likely that they would use 
the increased wages to give their children better clothing 
and education ? or would it probably result in a greater 
number of the same kind of laborers ? Would it not be 
necessary to raise their character as well as their wages, 
in order to attain a better standard ? 

9. Is the man who makes a piano a productive laborer ? 



LABOR AND ITS INCREASE. 35 

Is the person who plays on the piano also a productive 
laborer ? 

10. Is an artist a productive laborer? A photogra- 
pher ? 

11. Is a member of Congress a productive laborer? If 
we agree that a Congress is necessary to our enjoyment of 
a government under which wealth can be peacefully pro- 
duced, is a member of Congress always a productive la- 
borer ? Is he always doing that which produces wealth ? 

12. Does the diagram in section 29 also serve to illus- 
trate the working of two opposing forces in regard to the 
production from land? (See section 22.) 



CHAPTER V. 

CAPITAL AND ITS INCREASE. 

35. We have already seen that wealth is any thing 
which satisfies a desire, for the attainment of which we are 
wining to undergo some sacrifice, and which is exchange- 
able. But not all wealth is capital. Only that part of 

wealth is capital which the pos- 
sessor intends to use for the pro- 
duction of other wealth. Thus, 
in the diagram, all the wealth 
of a country may be repre- 
sented by A, and all its capital 
by B. The capital can never 
be greater than A, and of 
course it is much less than A, 
because not all wealth, after 
it is produced, is used to pro- 
duce other wealth again : it 
may be consumed in such a way that nothing else is made 
while it is being used up. *' Thus oats are capital * if they 
are to be given to a cart-horse, but not if they are to be 
given to a race-horse." A coat may be worn by a man who 
does no work at all, or by a man who tills his fields early 
and late. In the first case, the coat is wealth, but not 
capital, and in the second case it is wealth used as capital. 
Nothing, then, is capital which when being used does 

* Marshall, " Economics of Industry," p. 13. 




CAPITAL AND ITS INCREASE. 37 

not aid in making other wealth. All the wealth spent in 
buying, furnishing, and sailing a pleasure-yacht is not 
capital, because its use in that way does not result in the 
production of other wealth. 

36. When we pass from the most primitive age of 
society, it is found that labor can not be properly em- 
ployed without capital. There must be a store of the 
results of past labor laid up, so that, for example, it can 
furnish an artisan in a chair-factory with lumber and ma- 
terials on which he can work, with tools, lathes, steam- 
power, and factory buildings, and with food, clothing, and 
shelter, while he is occupied in making chairs. If the 
laborer does not himself own this capital, it must be fur- 
nished to him by some one who has it. This, of course, 
seems clear enough as industries are now carried on ; but 
we ought to see how this necessity for capital first arose, for 
without it we should be forced to live like Indians. " Let 
us take the case of a tribe dwelling along the shore, and 
subsisting upon fish caught from the rocks which jut into the 
sea. . . . When the fish are plentiful, the people live freely, 
even gluttonously. When their luck is bad, they submit 
to privations which involve suffering, reaching sometimes 
the pitch of famine. Now let us suppose that one of these 
fishermen, moved by a strong desire to better his condition, 
undertakes to lay by a store of fish. Living as closely as 
will consist with health and strength, he denies himself all 
superfluity even at the height of the season, and by little 
and little, accumulates in his hut a considerable quantity 
of dried food. ... As the dull season approaches, he 
takes all the food he can carry, and goes into the hills, 
where he finds trees whose bark can be detached by sharp 
stones. Again and again he returns to his work in the 
hills, while his neighbors are painfully striving to keep 
themselves alive. At the end of the dull season, he brings 
down to the water a canoe, so light that it can be borne 
upon his shoulders, so buoyant that he can paddle in it 



38 PRODUCTION. 

out to the ' banks ' which lie two or three miles from shore, 
where in one day he can get as many fish as he could 
catch from off the rocks in a week. The canoe is capital ; 
the fisherman is a capitalist. "* 

37' We see by this illustration that capital can result 
only from saving, or abstaining from consuming wealth for 
one's own pleasure. In the above example, the fisherman 
abstained from consuming any more fish than he actually 
needed, with the intention of keeping the dried fish he had 
saved to subsist upon while he was engaged in making 
other wealth, which was in this case a canoe. We may 
then say that capital is saved wealth intended for 
reproduction. While the capital is being consumed in 
reproducing something else, it can not be used for another 
thing at the same time. If this fisherman had given his 
dried food to the others for a great feast, he would have 
had nothing on which to subsist while making the canoe. 
The capital, by which more wealth may be produced, can 
not come into existence except by that hardship and sac- 
rifice which is involved in the word saving. After going 
through this sacrifice in the abundant season, the prudent 
fisherman would justly consider it very impudent indeed if 
another man were to come and claim that he had an equal 
right to this saved food, and that he wanted to use the 
food, but would not pay him anything for the use of it — 
that is, not reward him at all for his sacrifice and absti- 
nence. If this were ever permitted, it is not likely that 
much abstinence and saving for capital would go on ; and 
so we should be without the accumulations of boats, fac- 
tories, machinery, materials, houses, clothing, and food, by 
which so many laborers are able to continue working with- 
out interruption month after month and year after year. 
Wherever capital exists, some one who has had wealth, 
which he himself could have consumed in carriages or fine 
dinners or yachting, has refrained from making this use of 

* F. A. Walker, " Political Economy," pp. 63, 64. 



CAPITAL AND ITS INCREASE. 



39 



it and put it instead into a form by which, while being 
consumed, some new thing was produced. Only by saving 
capital, which is necessary to production, can the wealth 
of the world be increased. 

38. By the very fact of deciding to use his wealth 
as capital in producing new wealth, a man puts his wealth 
where it is consumed, since capital is able to reproduce 
other wealth only by being consumed. The wealth is 
either eaten up in the food or worn out in the clothing 
of the laborers, or it disappears in the form of materials 
only to reappear in a new form. Bread, meat, woolen 
clothing, hides, nails, thread, all disappear ; but in their 
place reappear shoes ready for the market. Productive 
expenditure, then, implies the consumption of wealth, 
with the usual result that a greater amount is produced 
in its place. This is illustrated by the career of the Duke 
of Bridgewater, in England.'^ " In his time English indus- 
tries were sadly hampered by the enormous cost of carry- 
ing goods from one part of the country to another. None 
of the roads leading into Manchester were passable by 
carts. Coals, corn, cloth, and other things were carried 
on horses' backs in summer. But in winter, when the 
roads were bad, Manchester was like a beleaguered town. 
The duke conceived the daring project of making canals 
to connect the manufactures of Manchester with the coal 
districts on the one hand, and with the sea at Liverpool 
on the other. He devoted all his wealth and energies to 
the work. He lived in the plainest manner, had long con- 
sultations with Brindley, the engineer, in rough log huts, 
and derived from the excitement of his enterprise a keener 
pleasure than he would have obtained from spending his 
wealth in luxury." The enterprise was a great success. 
" He bequeathed vast wealth to his descendants, but in 
the act of saving it he gave employment to vast numbers 
of workingmen. His canals are a source of the prosper- 

* Marshall, ibid.^ p. 15. 



40 PRODUCTION. 

ity of his country, and afford permanent employment to 
thousands." 

39. That capital is always being consumed and being 
reproduced in a new form, is a truth which it is well to keep 
constantly in mind. In the last diagram (section 35), in 
which circle B represents all the capital of a country, you 
can understand what is going on by imagining that, as you 
look at B, you are looking into a kettle of boiling water, the 
surface of which is always in ebullition, as new particles 
arise from the bottom and displace others on top, causing 
a constant and never-ending movement. So capital is con- 
stantly disappearing, and again reappearing as wealth. As 
a consequence, it is evident that those who consume wealth 
without at the same time producing new wealth to take its 
place act in a way to decrease the total wealth of the com- 
munity ; while those who turn their wealth into capital 
will not only produce an equal, but usually an increased, 
amount of wealth, and thereby add to the total wealth of the 
community. In fact they do more than that. By using the 
wealth as capital it gives occupation to laborers, 
which is not the case when the wealth is consumed with- 
out having production for its aim. A thousand dollars in- 
vested in an India shawl will while it is being worn out 
neither produce more wealth nor employ laborers ; but a 
thousand dollars spent in improving a farm by drains, 
good fences, and shelter for cattle, will not only bring new 
wealth in the place of that which was consumed in making 
the improvements, but it will also employ laborers while 
the improvements are being made. Indeed, one cannot 
make use of wealth as capital, that is, as a means of pro- 
duction, without employing more or less of labor ; for 
labor is a requisite to all production, and capital cannot 
get on without labor any more than labor can get on with- 
out capital. They cannot get on without each other any 
more than one blade of a scissors can cut without the 
other. Turning back to our figure in section 35, we see 



CAPITAL AND ITS INCREASE. 



41 



that, since capital is that part of wealth which is used in 
producing other wealth, circle B not only reproduces it- 
self but also all that part between B and A. So, if people 
use as capital more wealth than before (instead of con- 
suming it for their own enjoyment), it is evident that, 
circle B being larger, A would be larger, that is, the 
wealth of the country would be greater. Extravagance, 
certainly, is not a gain to the poor ; more good is done to 
the poor when people invest their wealth as capital than 
when they use it without adding anything to the stock of 
goods. 

40. Capital is of two kinds, lixed and circulating. 
*' Capital which fulfills the whole of its office, in the pro- 
duction in which it is engaged, by a single use, is called 
circulating capital. The tallow and alkali of which 
soap is made, once used in the manufacture, are destroyed 
as alkali and tallow."* In a factory, some of the capital 
must be constantly renewed out of the proceeds of the 
finished goods, and when thus renewed it is again used up 
in buying materials or paying wages. Such, for example, 
is the raw cotton in a mill, or the coal for the boilers 
which furnish steam, or the wages of the operatives. But 
there are other parts of capital (used in production) which 
are not exhausted by a single use, and which are called 
"fixed capital." A machine is not used up in making one 
piece of cloth. In fact, before it wears out, it may have 
made millions of yards. A hammer will not be used up in 
driving a single nail, but will drive thousands just as well. 
" Capital which exists in any of these durable shapes, and 
the return to which is spread over a period of correspond- 
ing duration, is called fixed capital." A hundred dollars 
invested by a farmer in seed must be all returned to him 
with a profit in the next crop ; but for a hundred dollars 
invested in a plow he need be repaid only a part each 
year, a part which will give him annually a profit, and 

* Mill, *• Principles of Political Economy," Book I, chap, vi, § i. 

5 



42 PRODUCTION. 

enough besides during the years it exists to make up the 
original cost of the implement. 

41. Now that we have learned what capital is, we can 
go on to inquire how capital can grow. Then, as it is 
one of the requisites of production, we shall have studied 
the increase from all the three requisites of production, 
land, labor, and capital, and can then, as a result, see how 
wealth can be increased, and whether there is any limit to 
its increase. 

Since all capital is the result of abstinence, the in- 
crease of capital depends (i) on the amount which can be 
saved^ and (2) on the disposition to save. That it depends a 
good deal on the amount to be saved is clear. All that any 
man has coming to him above the amount sufficient to pro- 
vide him with the necessaries can be saved, whether he does 
save it or not. This does not apply solely to a laborer, 
but to any one having an income. When wages are high, 
more can be saved by the laborer ; when profits are high, 
more can be saved by the owner of capital. This ought 
to make it evident that all classes in the community can 
save, and that, if any man saves, however little, he to that 
extent becomes a capitalist. The amount, for example, 
which is spent in tobacco and drink could be saved, and it 
amounts to hundreds of millions of dollars a year. Of 
course, if laborers become more efficient and get larger 
wages, the margin from which saving can be made becomes 
larger. 

42. Then, secondly, saving depends upon the disposi- 
tion to save. Two men, who have the same opportuni- 
ties to save, will not accumulate equal amounts of capital, 
because they will not be equally affected by the impulse 
to save. Think what it means to save. A man has wealth 
in his hands which belongs to him ; he can do with it what 
he pleases ; he can give himself a real enjoyment by spend- 
ing it for his own uses. It is a great temptation to do so ; 
and, if he does not yield to the strong eager desires of the 



CAPITAL AND ITS INCREASE. 43 

present (which are strong, because the enjoyment is capa- 
ble of immediate realization), he must have some object 
to gain in the future which will be attractive enough to 
overcome his existing desires ; that is, in order to save and 
add to his capital^ he must be able to set a future and unseen 
object before him, as compared with a present and seen 
enjoyment. Consider what this means in every-day life. 
You have suddenly given to you a thousand dollars, and 
you can use it for your own enjoyment in buying guns and 
ammunition, in going a long distance to North Carolina 
for duck-shooting, or to Wyoming for deer-shooting, and 
spending the wealth in several months of pleasure ; or you 
can say, ^' I will give up all present use of this wealth ; 
I will abstain from consuming it, and invest it so that it 
shall yield me an income of fifty dollars a year ; for after 
a while it will be of great service to me in enabling me to 
go into business, or in acquiring a college education, or 
in saving my mother and family from suffering in times 
of illness or hunger." The future gains, although unseen^ 
are much more likely to be worth the sacrifice of saving 
than the satisfaction of having a good time now and losing 
all the wealth in an act of spending. Some people, how- 
ever, especially the wretchedly poor, find it very hard 
to save ; and yet they too can save, if they set aside 
all that is not necessary to live upon. Every additional 
saving gives them protection against " a rainy day," or 
the means to buy a cow or a horse, and they get thereby 
more chances to save. A little capital is a means of lift- 
ing a laborer out of a wretched condition, and the more 
capital he saves, the longer the lever he can use to raise 
his position in life, and the greater progress he can make. 
" To him who hath more shall be given." 

This is the thing to teach every one : to set the unseen 
above the seen. The Indians in Paraguay were very in- 
dustrious and worked hard all day under the direction of 
the Jesuits. At night, when they came home hungry from 



44 PRODUCTION, 

plowing with the oxen, without thinking ahead even as 
far as the morrow, they killed the oxen for supper. This, 
of course, cut them off from plowing and from planting 
corn, to keep them alive during the winter. The present 
was stronger than the future. But here in the United States, 
people will work in cutting down trees, digging out stumps, 
and only after several years of preparation will get a piece 
of land ready to grow food. This is a sign that the future 
unseen object is present with them ; and makes the differ- 
ence between them and Indians. Can you imagine Indians 
or a semi-civilized people engaged on a work from which 
the return is spread over a hundred years or more, like the 
canal connecting the Mediterranean and the Red seas? 
As this power to set the future above the present distin- 
guishes us from the Indians, so, among the people of the 
United States, it distinguishes the thrifty from the shift- 
less and prodigal. 

43. — Exercises. — i. Is the intelligence of the labor- 
er, capital to him? (Consult the definition in section 35.) 
Can he exchange it for something else ? If he cannot 
exchange it, can it be wealth (section 4) ? If it cannot be 
wealth, can it be capital ? Are the results of his skill in 
the form of commodities wealth ? 

2. Are the goods on a shelf in a store capital to the 
owner ? Does he so employ them as to gain for himself 
other wealth ? 

3. Two bushels of potatoes stand in a shop. One 
bushel is bought and used on a yacht to feed the crew on 
a voyage to Mt. Desert ; another bushel is bought by a 
coal-heaver. Which of the two bushels could be called 
capital ? Or are they both capital ? 

4. Try to name some employment, if you can, in which 
labor, without capital, produces wealth. Would hunting 
serve as an example ? How about the hunter's gun, or 
his bow, or his trap ? Would fishing serve as an example ? 
How about the hooks and lines of the fishermen ? 



CAPITAL AND ITS INCREASE. 45 

5. A shoemaker took some leather, pegs, nails, thread, 
wax, some tools, and a bench ; while working, he ate some 
food, wore woolen clothes, and paid some rent ; and at 
the end of a few days produced a pair of shoes. Did he 
have any capital? Could he have been ready to make 
shoes without tools and food ? Did he save in order to 
get these things ? If he had not set aside food, could he 
have gone on working ? How else could he have got his 
food without saving ? 

6. From this illustration of a shoe, show that wealth 
is consumed in being used as capital. What has been con- 
sumed in making the shoes ? Is the pair of finished shoes 
an equivalent for all that was used up in the making ? 

7. Does the man who keeps 500 horses in his stables 
for his own use, or the man who lives frugally and spends 
f 1,000,000 in cultivating ten farms in Minnesota do the 
more to increase the wealth of the country ? 

8. Are the canal-locks which carry steamers around 
Niagara Falls capital ? Are they fixed or circulating capi- 
tal? . 

9. Select some establishment such as a tannery, a 
cooper-shop, or a foundry, and write a list of the things 
which would be called fixed capital in use there. 

10. It is said that a Chinaman can live on ten or 
twenty cents a day. If he receives a dollar a day, how 
much can he save ? If he lays by all he does not need 
for food, clothing, and shelter, can he save more than a 
European who drinks beer or wine intemperately? 

11. Why do not the Apache or Sioux Indians have 
bank-buildings, factories, or fire-engines to protect their 
houses from destruction ? 



CHAPTER VI. 

EFFICIENCY OF PRODUCTION. 

44. We have now ascertained the possibility of an in- 
crease of wealth through land, labor, and capital, the 

three requisites of production. We found that labor can 
increase indefinitely ; that capital increases with the dis- 
position to save (which grows with the progress of civiliza- 
tion), and with the amount which can be saved ; but that 
from land there is a tendency to diminishing returns, 
which, however, is more or less counteracted by the 
progress of improvements. It is evident that there will 
be labor enough ; there will be no limit to increasing 
wealth due to a scanty population. How about capital ? 
It has a practical limit, for it cannot increase indefinitely, 
and its increase is kept back whenever land begins to 
yield diminishing returns. For, if capital and labor con- 
tinue to get less and less from land, the total wealth can- 
not be increased so fast, and the total capital will probably 
be less. This, however, can be prevented by a greater dis- 
position to save ; since, even if a man gets a less return for 
his investment, he may become more frugal than before, 
so that a less return may permit as much or more sav- 
ing than before. Then, although the tendency to dimin- 
ishing returns from land is always felt, and so hinders 
the increase of production, we know that improvements, 
especially in the present century, have enabled all lands 
to yield more produce, have opened new and rich lands to 
(40 



J^FFICIENCY OF PRODUCTION, 47 

cultivation, and to that extent have deferred the effects of 
diminishing returns. 

It is now, perhaps, evident that only through changes 
in some of the requisites of production, can more wealth 
be produced. The amount of wealth produced in a 
country, then, will depend on the following causes : 
First, not merely on the number of the laborers, but on 
their physique, their intelligence and skill, and their moral 
character ; second, on the fertility of the soil, the abun- 
dance of coal and minerals, the situation of rivers and 
water-ways, a temperate climate, and the extent to which 
improved processes are being adopted to extract ores from 
the soil or carry them over the country ; and, third, on 
the "abundance of roads and railroads, of canals and 
docks, of factories and warehouses, of engines and ma- 
chines, of raw material, of food and clothing, in short, the 
already accumulated capital of the nation " ; * and on the 
prevalence of a disposition to save and to increase this 
capital. This is the general statement, indicating how 
each requisite of production affects the whole result by in- 
fluences affecting each one by itself ; but it will be evident 
at once that there are some other things which affect more 
than one of these factors at the same time, and which thus 
affect the total amount of wealth. 

45. One of these influences is the ownership of 
land, or, as it is sometimes called, " peasant-proprietor- 
ship." This affects not only the quality of the labor, 
but also the saving of capital, and the amount of produce 
to be got from the soil. When a man owns his land, he is 
working for himself; there is no reason for shirking and 
giving poor work, for he would be cheating only himself ; 
and so we find that the people who own their lands 
become noted for industry and for the care with which 
their soil is tilled. When a man only leases his house and 
land, he does not take the same care with buildings and 

* Marshall, ibid., p. 37. 



48 PRODUCTION. 

improvements. Said Arthur Young : " Give a man secure 
possession of a bleak rock, and he will turn it into a gar- 
den ; give him a nine years' lease of a garden, and he will 
convert it into a desert. . . . The magic of property 
turns sand into gold." The ownership of land is like an 
ever-present inducement to deposit in a savings-bank. 
The owner can constantly see where a judicious invest- 
ment would improve the value of his property, and so he 
is tempted to save until he can do it. In his extra hours 
he digs a drain here or repairs a fence there, he nails up 
a loose board or adds a little to his barn. The land ap- 
peals to his pride and to his self-respect ; he looks forward 
to the future and does not live only in the present. In 
France the "peasant-proprietors" are widely known for 
their extraordinary thrift and frugality, while the poor 
people of Ireland, who, as a rule, are only tenants, are 
noted too often for their shiftlessness and imprudence. In 
the United States the farmer generally owns his land ; and 
in the cities, where workmen have begun to own their 
houses, it has had a good influence on their general habits, 
and made them better citizens. 

46. One of the most important influences affecting 
the efficiency of production is division of labor. In 
early days in this country the women wove all the cloth 
worn by the family ; now a great number of persons are 
concerned in the different parts of cloth-making. Instead 
of one person alone scouring the wool, carding, spinning, 
and weaving it into cloth, the different parts of the work 
are now done by different persons, who confine them- 
selves to only one part of the process, and who often know 
nothing about the other parts. This is what is meant by 
"division of labor." One set of men in a mill sort the 
fleeces, and the different portions of each fleece, into per- 
haps a score of different sorts of fiber, each differing in 
length and softness or fineness of fiber, and each best 
adapted for some one particular grade of yarn or cloth. 



EFFICIENCY OF PRODUCTION, 



49 



Another set of men scour the wool by aid of a machine ; 
another dye it ; another put it into a machine marvelously 
contrived so that the wool is carded, or pulled out evenly, 
with all the fibers parallel ; another put it into spinning- 
machines with rollers which draw it out and twist it into 
yarn or thread ; another watch a complicated loom, by 
which the threads are woven into cloth with elaborate 
patterns ; another treat it with a peculiar soap in fulling 
machines, condensing and matting the fibers together, and 
softening the texture ; another put it on a cylinder into 
which " teasles " are fastened (the prickly head of a plant 
for which no substitute has yet been invented), which 
pulls out the ends of fibers near the surface and combs 
them all one way, forming a nap ; another pass it through 
a machine under sharp knives rapidly revolving, which 
shear ofi" the ends of the fibers in the nap to a uniform 
length, forming an even, finished surface ; another meas- 
ure and pack it ; another cart it to the railway. In this 
system all the energy of the laborer is concentrated solely 
on one part of the process, and he becomes wonderfully 
skillful and dexterous with his hands. You can see an 
illustration of division of labor in almost any shop : in a 
foundry, one man makes the wooden pattern ; another 
molds ; another cleans the castings from sand, and chips 
off protruding waste pieces ; in an iron - mill, where 
wrought iron is made, one man stirs the melted iron, 
and carefully burns out certain of the impurities ; an- 
other directs its course through the powerful rolls which 
transform the shapeless lump into bar or plate ; in a 
planing-mill, one man manages a buzz saw, another runs 
a lathe. " Practice makes perfect," the maxim says. A 
workman who does one thing constantly can become 
very rapid and accurate. In this way, working together 
with others, a much greater amount can be produced 
by division of labor than without it. Five hundred per- 
sons, each with a spinning-wheel and loom, doing all 



50 PRODUCTION. 

the various things to make a yard of cloth, could not 
begin to make as many yards as five hundred persons, 
each of whom did only one part of the work. The dex- 
terity of each workman becomes greater, if he is not 
obliged to shift from one employment to another. " Even 
a child, after much practice, sums up a column of figures 
with a rapidity which resembles intuition. The act of 
speaking any language, of reading fluently, of playing 
music at sight, are cases as remarkable as they are fa- 
miliar. Among bodily acts, dancing, gymnastic exercises, 
ease and brilliancy of execution on a musical instrument, 
are examples of the rapidity and facility acquired by 
repetition." * 

47. Then another gain from division of labor is to be 
found in the possibility of classifying laborers according 
to their capacity. Some parts of the work require great 
strength, while others do not. It would be a waste of 
effort to make a strong man do that which a weaker 
man could do equally well. Also, it would be a waste of 
special abilities to use a man who was clever at figures 
in watching a machine which scours out the wool. Or a 
man who is a skillful surgeon ought not be forced to break 
stones in the street, which any unskilled laborer can do. 
In this way, by separation of employments, people can 
often find something for which they are peculiarly well 
fitted. And this generally results in better work, because 
it is done more intelligently and more cheerfully. In fact, 
all through society we find this division of labor. Each 
man produces that of which he can produce the most, and 
with his products purchases the other things he wants. A 
farmer does not m'ake his scythe ; he can produce grain 
with which to buy the scythe with less expense than he 
could make one. A lawyer conducts cases in the courts, 
and thereby saves many persons from the toil of studying 
the law for themselves. 

* Mill, ibid., Book I, chap, viii, § 5. 



Efficiency of production. 51 

48. Different countries, moreover, or different parts 
of the same country, like different persons, are variously 
adapted for producing commodities. Greenland can 
produce ice for Brazil, and Brazil can produce bananas 
for Greenland. It would cost a great deal to grow ba- 
nanas under glass in Iceland, while in Brazil they grow 
in profusion out of doors — almost as plentifully as seals 
in Greenland. A gain to the total production of the two 
countries will ensue when each adapts its labor to the 
industries best suited to itself, and in which its labor is 
most efficient and most productive. The climate, the soil, 
and the minerals given to a country by nature determine 
whether one country has an advantage or not in certain 
industries. No country is like another in its natural re- 
sources, and no country can produce all things equally 
well with another. It may have superior advantages in 
some things, moderate facilities in others, and none at all 
in others. 

49. But division of labor can be carried to its full ex- 
tent only in the making of articles for which there is a 
large demand, such as shovels, or cotton and woolen 
goods. For the expense and care needed in the inven- 
tion, building, and management of a machine to do a 
special part of the work are as great when only a few as 
when many goods are made. There would be waste if 
a machine were to lie idle ; and so, in a shop where only 
few goods are made, it would not do to buy expensive 
machinery which does only one part of the work. In 
the manufacture of watches, for example, so many are sold 
that one factory can have machines which are invented 
to produce but one single piece out of a hundred which 
enters into the finished watch. One man can thus be oc- 
cupied solely in taking from each box one part after an- 
other which go to make up a watch, and then passing it 
along to the next worker. 

50. This makes it clear that, where the demand is 



52 PRODUCTION. 

large, so that division of labor can be carried out fully, 
the establishment must be a very large one. The tend- 
ency in such cases, of course, is to the creation of large 
factories under one management, which is called the system 
of large production. In order to bring many laborers 
together, and to furnish the specialized machinery, there 
is needed a great amount of capital. " Let us take as an 
example a set of operations, which we are accustomed to 
see carried on by one great establishment, that of the post- 
office. Suppose that the business, let us say only of the 
letter-post, instead of being centralized in a single con- 
cern, were divided among five or six competing companies. 
Each of these would be obliged to maintain almost as 
large an establishment as is now sufficient for the whole. 
Since each must arrange for receiving and delivering let- 
ters in all parts of the town, each must send letter-carriers 
into every street, and almost every alley, and this, too, as 
many times in the day as is now done by the post-office, 
if the service is to be well performed." * 

The larger the production, and the greater the division 
of labor, the cheaper each single piece of goods can be 
sold. Once the organization is complete, an increase of 
business does not cause a proportional increase of expense. 
Again, when one manager does the work of several, there 
is a saving in the expenses of paying managers. Of course, 
in cases where the division of labor in a very large estab- 
lishment enables the labor and machinery to be used with 
more efficiency, or enables a more economical arrange- 
ment of the work among the laborers, more will be pro- 
duced with the same labor, and so smaller establishments 
may often be undersold and driven from the market. A 
small factory may, however, be devoted to making but one 
thing, and so it may get along by working as subsidiary to 
some greater industry. But in producing the same things 
a large establishment has an advantage, and will generally 

* Mill, ibid., Book I, chap, ix, § i. 



EFFICIENCY OF PRODUCTION, 



53 



undersell the smaller. Yet the consumers of their goods 
will be able to make their purchases cheaper. 

51. Another matter affecting production is too often 
underrated, and that is, managing ability. The man- 
ager, who selects the site of the factory, controls the 
finances, buys materials and sells the goods ; who decides 
upon what machinery to use ; who deals with the work- 
men, allotting the tasks, and classifying their labor ; who 
watches the market, knowing when to sell and when to 
withhold his goods ; who can find out satisfactorily what 
purchasers really want, and adapts the character of his 
goods to these wants — such a manager, who makes the 
most of everything, is a rare man. As it is he who plans 
everything in the productive process, all depends on 
his skill and his ability to avoid mistakes, for his failures 
affect not himself alone but all engaged in the work. " He 
is the general of the army ; he fixes on the plan of opera- 
tions, organizes its means, and superintends its execution. 
If he does this well, the business succeeds and continues ; 
if he does it ill, the business fails and ceases. Everything 
depends on the correctness of the unseen decisions, on the 
secret sagacity of the determining mind." So said Walter 
Bagehot. In fact, we find again and again that the reason 
why such and such an industry thrives and grows, is be- 
cause of the organizing and executive ability of a single 
man. The same railway under one president earns money 
and all goes well ; but under another it falls into arrears, 
and accidents or disasters are always happening. 

52. Exercises. — i. What is it that prevents capital 
from increasing indefinitely.? Provided the disposition to 
save remains the same, would as much be saved if the re- 
turn to capital and labor from land constantly diminished.? 

2. Would improvements help the increase of capital ? 
Do they increase the returns to capital and labor ? If so, 
of the two things on which the growth of capital depends, 
which would be affected ? 



54 



PRODUCTION. 



3. If a man thinks of planting an orchard on the land 
he cultivates, will it make any difference to him whether 
he owns the land or not ? 

4. Describe some factory or shop in which you have 
seen a division of labor in making an article. 

5. Why can more be produced when the different opera- 
tions are divided among many persons ? 

6. Could not a farmer do as well to produce his shoes, 
hat, and clothing as well as his grain ? Does any intelli- 
gent farmer do it ? If he does not, what is the reason ? 

7. Why is it that every town has a great number of 
different trades ? 

8. On your breakfast-table there may be some linen 
from Germany or Ireland, some china-ware from France, 
some cutlery from England, some spice from the East 
Indies. Why was it best to get these articles from other 
countries ? 

9. Think over the largest factories in your neighbor- 
hood, and see whether they are engaged in making articles 
of common use. Do you know whether any of them use 
machinery ? Name any kinds you know about. 

10. Recall what is meant by a "market" (section 9). 
Is it easy to find out what people want in different parts 
of the country ? In any business, who has charge of this 
matter? If he makes a mistake and goes on producing 
when people do not care for some of his goods, does it 
affect his laborers ? 



BOOK II 



EXCHANGE 



(55) 



CHAPTER VII. 

VALUE. 

53. It will have been noticed that in Book I nothing 
has been said about value, or prices, or money. It was 
deemed best in studying production to assume that articles 
were made and exchanged by barter, without the use of 
money. It is no longer our object now to discuss how wealth 
can be produced, or what will increase it, but to study 
how it is that articles are exchanged for one another, 
how much of one thing is given for another, and how 
money is used to help these exchanges. It will be neces- 
sary to think a little, and to see things as they really are, 
and not as they seem to be on the surface. When men are 
using money, they seldom think of its representative char- 
acter. They generally think that money itself is the thing 
for which every one labors and produces. There could be 
no greater mistake than this. In order to understand this 
subject better, we shall first try to explain something about 
value. 

54« 111 the beginning, we must try to find out what 
value is. In brief, exchange value is purchasing" 
power ; that is, a commodity has more or less value, as 
it may be exchanged for more or less of other things. The 
value of an ox, estimated in sheep, is the number of sheep 
for which the ox may be exchanged. If one ox ex- 
changes for twenty sheep, it is twenty times as valuable as 
one sheep, or a sheep is one twentieth as valuable as an 

(57) 



58 EXCHANGE. 

ox ? To express it in other words, value is a ratio, or a 
relation between one thing and another. We must always 
have something with which to compare a given article in 
order to determine its value. We cannot say whether a 
thing has purchasing power, unless there is another thing 
to be purchased by it, any more than we could say that 
one man was taller than another, if no other man existed 
with whom to compare him. Whenever we say that a 
thing has exchange value, we have in mind, consciously or 
unconsciously, some other thing or things with which we 
are making a comparison. 

55. This leads us to notice another matter in con- 
nection with value. If value is a ratio, or a relation of 
one thing to another, a rise of value in one thing 
means a fall in the value of something else. In 
the illustration already used, if the ox rises in value, that 
means that its purchasing power over sheep has increased, 
as indicated by the fact that the ox, for example, is now 
exchanged for thirty sheep, instead of twenty as before. 
That very fact shows that the rise in value of the ox was 
the same as a fall in the value of sheep. On the other 
hand, the value of sheep is their purchasing power ; and, 
since it now requires thirty instead of twenty sheep to buy 
an ox, it is evident that the purchasing power of sheep 
over an ox has declined, or that their value relatively to an 
ox has fallen. This is looking at the change from the point 
of view of the sheep. If the value of the ox goes up, the 
value of the sheep goes down. If one end of a board 
balanced across a log goes up, the other end must neces- 
sarily go down. 

56. If we can now see clearly that a commodity has 
value only in comparison with another thing, we can go on 
to explain some other questions. We have come to under- 
stand what value means. Now it will be well to learn 
why a thing has value. If we were studying about fire 
and heat, we should first want to know what heat was, 



VALUE. 



59 



and then we should want to know what makes or causes 
heat. So we want to find out next what gives value to 
anything. For this purpose let us recall our definition 
of wealth (section 3). Wealth was there defined as some- 
thing transferable, for the enjoyment of which we were 
willing to undergo a sacrifice. It might have been said 
equally well that wealth is that which has value ; 
from which it is naturally inferred that a thing (i) which 
is transferable, and for the (3) enjoyment of which we are 
willing to undergo a (2) sacrifice, has value. This is true. 
In order to have value an article must be : (i) one 
which is transferable ; (2) one for which we are 
willing to undergo some sacrifice ; and (3) one 
capable of satisfying some desire. 

57» First, to have exchange value, a commodity must 
be transferable. There may be other things more de- 
sirable than wealth ; but, no matter how desirable an arti- 
cle is, it is not wealth and has no exchange value unless it 
can be transferred. A man's intelligence or honesty is a 
desirable thing, but you cannot separate it from the man 
and exchange it for anything else. Who ever heard of 
a business man, taking an inventory of his wealth, who 
summed up his articles of value in this way ?^ 

Hardware $5. 000 

House 2,000 

Horse and carriage . . 400 

Honesty ? 

Intelligence ? 

Does a poor man who is honest count his honesty in 
as a. part of his wealth ? No, it is absurd. " The gouty 
millionaire cannot, with all that he has, purchase the ro- 
bust health of the laborer by the wayside, or buy for his 
empty-headed son the learning or the trained faculties of 
the humblest scholar. Hence, all that which some econo- 
mists have called intellectual capital and all that which 



6o EXCHANGE, 

by analogy might be called physical capital are to be ex- 
cluded from the category of wealth." * So, also, a barrel 
of beef at the north pole or a bushel of wheat at the bot- 
tom of the sea could not have exchange value, because it 
would be impossible to transfer them to any one. 

58. Secondly, to have value, a thing must be such that 
we are obliged to undergo some sacrifice in order to 
get it. It is very difficult, for example, to get pearls ; be- 
cause divers must go down into the sea for them, and even 
then they do not often find large ones. Under these con- 
ditions, a large pearl may be exchanged for many tons of 
coal, even though the coal is thousands of times as big as 
the pearl ; because it is not so difficult to find coal and 
to mine it. The sacrifice undergone is greater in getting 
a pearl than in getting a piece of coal of much larger size ; 
in fact, the number of days' labor spent in finding a large 
pearl would, if spent in coal-mining, produce several tons 
of coal. Then, if the pearl costs more labor to get it than 
a piece of coal, it is evident that more sacrifice is required 
in the case of the pearl than in the case of the coaL 

We may see this matter still more clearly if we imagine 
pearls to be as plentiful as pebbles, and that any one stroll- 
ing out might pick up as many pearls as he can now pick 
up pebbles. Would the pearls be as valuable as before ? 
Certainly not. Would any one give several tons of coal 
or several large gold coins for a pearl when he could have 
one for the trouble of picking it up ? The exchange value 
of the pearls would be no greater than the pebbles ; we 
should give no more for a wagon-load of pearls than we 
should for the wagon-load of pebbles with which we grade 
our roads. Whenever the sacrifice or exertion necessary 
to get an article diminishes, it will be generally found that 
its value diminishes. If it requires a relatively less num- 
ber of day's labor to produce a pair of shoes or a bushel 
of corn, the exchange value of shoes or corn will fall. 
*F. A. Walker, " Political Economy," p. 6. 



VALUE. 6i 

59. Thirdly, to have value, an article must satisfy 
some human desire. Would a thing have exchange 
value, that is, would you give for it desirable goods, if you 
did not want it ? Would you give away things which had 
purchasing power for articles which excited in you no de- 
sire whatever ? It is quite unlikely. Would a man who 
had all the water he wanted to drink give away the berries 
he had gathered by a whole day's labor for more water 
which he did not want, and which satisfied no thirst ? 
Certainly not. People do not work steadily in heat and 
in cold to get something which satisfies no desire. In 
fact, the only reason why men work to produce wealth is 
to satisfy some want ; because they are hungry, or want 
clothing and shelter, or a horse, or a gun, or some luxury, 
like a piano, or a picture. We saw once before (section 
8) that wants furnish the reason for all production of 
wealth. 

The same thing might serve a different use at different 
times and places. In cities where immense water-works, 
with costly stone walls, viaducts, and iron pipes, are re- 
quired to carry the water throughout the city to each 
house, water brings a price per gallon, because it can not 
be had for the taking ; but in the country, where springs 
or rivers furnish an unlimited supply, water has practically 
little or no value. Again, however, to a man perishing in 
a sandy desert, water would satisfy the strongest desire he 
has, and its use to him would be very great. He would 
give his horse, or all his money, for a pint of water. From 
this it can be seen that human wants vary widely ; that 
the strength of the desire for the same thing may vary. 
The desire for food to eat is a very much more important 
one than a desire for an extra coat ; but, after a certain 
amount of food has been consumed, there will be very 
little desire for any more. Up to a certain point the de- 
sire is intense, but after that it becomes very weak. More- 
over, different classes of people have different desires to 



62 EXCHANGE. 

satisfy. Some think that a comfortable living with very- 
few luxuries is enough ; others that a large house, horses, 
pictures, music, and foreign travel is not more than 
enough. The habits of living settle the character of a 
people's desires ; the wants of a farmer might be very dif- 
ferent from the wants of a skilled mechanic. The people 
of Mexico have a very different set of desires from the 
people of Ohio ; or the people of India from those of Eng- 
land, 

60. We have, to this point, explained, first, what value 
is ; next, what it is that gives value to anything ; and now 
it is our purpose to consider how value is measured. 
As in studying heat, after finding out what it is and what 
produces heat, we want to know how to measure it. You 
would say fire (or combustion) causes heat, and a ther- 
mometer measures it. It may be said that we are looking 
for a measure of value that corresponds with the thermome- 
ter as a measure of heat. We want to find whether there 
is any scale to which we can refer two commodities, and 
in which we can express their values, and can then com- 
pare them with each other. 

The value of anything, as we have said, is its purchas- 
ing power, and we have compared an ox with sheep to 
explain that idea ; but there are many more things ex- 
changed than oxen and sheep. If I have a coat, how can 
I know its value relatively to sheep, oxen, corn, and thou- 
sands of other things ? For how much corn will the coat 
be exchanged .? If we had one thing with which to com- 
pare the coat and corn, then we could tell their relations 
to one another. It is just like reducing fractions of dif- 
ferent kinds to a common denominator ; if I want to com- 
pare \ and i, I can do nothing until I have reduced them 
both to fractions of the same kind, as j^ and ^ ; now I 
know that \ is greater than -J, and greater just in propor- 
tion as 8 is greater than 5. We ought then to find a 
common denominator of value. 



VALUE. 63 

61. First of all, the common denominator of value must 
itself have value, and gold and silver have been chosen 
by common consent for this function. If, then, we find 
out for how many grains Troy of gold the coat will be ex- 
changed, we shall learn the value of the coat relatively to 
gold. There are 23.22 grains of pure gold in a dollar, 
and, if a coat can be exchanged for ten dollars, it will buy 
232.2 grains of gold. This is what we call the price of 
the coat. Its price is ten dollars ; but that means only 
that it can be exchanged for as many grains of gold as are 
found in ten dollars, A dollar is not an abstract thing, 
but is made up of something which has value. The price 
of a thing -is only its value relatively to a common de- 
nominator, like gold or silver ; price is the amount of 
money for which an article may be exchanged. 
But so far we have reduced only the coat to the common 
denominator of value ; next we must do the same with the 
corn. We find, for example, that two bushels of corn are 
exchanged for 23.22 grains of pure gold, or one dollar. At 
this rate twenty bushels can be exchanged for 232.2 grains, 
or ten dollars. The price of twenty bushels is ten dollars, 
and of one bushel one-half of a dollar. Thus we have 
found the value of corn relatively to gold, or its price, and 
have thus reduced its value also to the common denomina- 
tor of value. Now it will be easy to compare the value of 
corn with the value of the coat without an actual exchange. 
The coat can be exchanged for twenty bushels of corn ; 
or the coat is twenty times as valuable as one bushel of 
corn ; and a bushel of corn is one twentieth as valuable 
as the coat. Therefore, if in the same way we compare 
each of the thousands of commodities in the world with 
money, we can get their value relatively to money as ex- 
pressed in their price^ and then we can compare any of 
these various articles together by means of their prices. In 
this way we compare the values of articles by first compar- 
ing them with a given article like gold, just as we compare 



64 EXCHANGE. 

distances by referring them to a particular unit, such as a 
foot, or a yard, or a mile. The two sides of a room being 
of different lengths, we find how many times a particular 
length, called a yard, can be applied to each distance, and 
then we say that one side is eighteen yards, and another 
is twelve yards. If we have a piece of cloth in a store, 
we reduce it to a common unit of length, or yard-stick, 
and say it is seven yards long. The operation is essen- 
tially the same when we express the value of a thing rela- 
tively to money by giving its price. 

62. From the fact that, when there is a rise in the value 
of any commodity, there is a corresponding fall in the 
value of some other commodity, is deduced an important 
proposition — there can not be a general rise or fall 
in the values of commodities. Since a fall in the ex- 
change value of one article is necessarily followed by a 
corresponding rise in the value of the thing with which it 
is compared, it is evident that these two commodities can 
not both rise or both fall at once. If one half of all the 
wealth in the country rose in value, that would of itself 
show that the other half fell in value, so that a general rise 
or fall of values is an absurdity. As Mill says, " Things 
which are exchanged for one another can no more all fall 
or all rise than a dozen runners can each outrun all the 
rest, or a hundred trees all overtop one another." 

63. Although commodities can not all rise or fall in 
value at once, it is possible that the relations between one 
article and all others may change. That is, one commod- 
ity, say gold, might exchange for more or less of any and all 
other commodities ; for it is conceivable that gold might, 
at different times, have a greater or less value (as the case 
might be). Now since gold, for example, can fall in value 
relatively to other things, the other things can be exchanged 
for more gold than before ; but, since the amount of gold, 
or money, for which a thing can be exchanged is its price, 
these other things will have higher prices. So, since the 



VALUE. 65 

commodity out of which money is made can rise or fall 
relatively to everything else, there can be a general 
rise or fall of prices. That is, when gold falls in value, 
all other things rise in value relatively to gold ; they can 
be exchanged for more gold than before, and their prices 
are higher. When gold rises in value, all other things fall 
in value relatively to it ; they can be exchanged for less 
gold than before, and their prices are lower. Therefore, 
although there can not be a general rise or fall of values, 
there can be a general rise or fall of prices. 

64. Exercises. — i. What is exchange value ? Has a 
chair exchange value ? Has air ? 

2. What is meant by saying that value is a ratio ? Sup- 
pose five bushels of wheat are exchanged for ten bushels 
of oats ; show how a rise in the value of wheat would af- 
fect the value of the oats relatively to wheat. 

3. Does political economy have to do only with things 
which have value ? Does it include the consideration of 
such things as truthfulness ? 

4. Why does a chair have value ? 

5. Does land have value? Is it transferable? Can 
land be bought and sold ? What is a deed for ? 

6. A bushel of corn is exchanged for twenty grains of 
gold ; a pound of mutton for four grains of gold. What 
is the value of corn relatively to mutton ? 

7. When bananas grow by the road-side in profusion 
in warm climates, do they have exchange value ? 

8. Does a diamond satisfy any desire ? Are large dia- 
monds plentiful ? If diamonds were as plentiful as peas, 
would they have any value ? 

9. Why does not a cart-horse have the same value as a 
race-horse ? Is not the former more useful than the latter ? 

10. Would a bag of gold be of value to a shipwrecked 
sailor on a rocky and deserted island ? Would it satisfy 
any desire ? Could it give him food or drink ? Could he 
clothe himself in it ? 



66 EXCHANGE. 

11. When people sell grain for money, what is done 
with the money ? Do they eat the money ? In selling 
grain for money, is it the object to get and keep money, 
or to get money with which to buy something else ? 

12. If general prices go up, what does that signify in 
regard to the value of gold or silver ? 

13. If prices fall, is the general wealth of the country 
any less ? Are there as many articles of value as before 
prices fell ? 



CHAPTER VIII. 

MONEY. 

65. After commodities are produced, and are ready 
to be exchanged, all means of facilitating the exchange are 
of great importance. In fact, we exchange goods every- 
day so easily that it never occurs to us to think how it is 
done, or what wonderful contrivances have been devised 
for the purpose by mankind through long centuries of 
experience and usage. Every man who works is actuated 
by a desire for something, and what he produces gives 
him the means of getting that which will satisfy his de- 
sires. One rich man devotes all his capital and time to 
employing labor in making thousands of stoves ; but stoves 
cannot in themselves give him food, drink, shelter, or 
clothing. He cannot eat stoves ; but he can exchange his 
stoves for food, or for any of the great number of things 
he wants. Yet it would be very troublesome to exchange 
one commodity directly for another, and therefore men 
have in the process of time contrived means of over- 
coming the difficulty. The two great machines discovered 
for facilitating the exchange of goods are money and 
credit. They are the two tools of exchange invent- 
ed only after long trial and experience. At present we 
shall treat of money only. 

66. If there were no money, it would be an extreme 
inconvenience to be obliged to barter one commodity for 

another. Anything like the trade and business we see 

(67) 



6^ EXCHANGE. 

around us to-day would be impossible without some com- 
mon denominator of value. How can a person know 
how many books or eggs to give for a stove ? Money- 
solves this problem at once. We saw in the last chapter 
that, by finding the relation of the books and the stove to 
a third commodity, like gold or silver, we can find their 
relations to one another. On comparing a stove with gold, 
we find, for example, that it may be exchanged for the 
quantity of gold in twenty dollars ; while a book pur- 
chases of gold only that quantity which is in one dollar. 
Inasmuch as we have agreed to call the quantity of gold 
for which a commodity may be exchanged its price, we 
get the prices of the two articles. Then we can compare 
their exchange values by comparing their prices. Thus 
we find that a stove will exchange for twenty books. So 
the first function of money we shall call the common de- 
nominator of value. Some writers speak of it as a "meas- 
ure of value " ; but it will be better to think of money as a 
means of comparing the values of two commodities 
through a third, just as we compare two fractions by 
reducing them both to a common denominator. 

67. It must have occurred to us, however, that we 
cannot compare two things having value (or purchasing 
power) with a third thing which has no value. Whatever 
is used to measure the purchasing power (or value) must 
itself have purchasing power. You could not compare the 
stove or book with money, unless the money had pur- 
chasing power over stoves or books. This third thing, 
which we use as a common denominator, therefore, 
must itself in the nature of things have value. It is 
the same with other measures. Why do we not measure 
the distance from Boston to New York by saying it is so 
vcidiny pecks? Simply because a peck is a unit of capacity, 
or contents, and length is an entirely different thing. We 
can measure length only with length ; we can measure the 
distance by saying it is so many feet, or yards, or miles. 



MONEY. 69 

because a mile is a unit of length. We can no more esti- 
mate the value of things in a commodity which has no 
value, than we can measure length by pecks. 

68. We have already found that one duty of money is 
to serve as a means of comparing value. We shall find 
that it also does duty as a means of transferring value, 
or as a medium of exchange. This use of money is 
the most familiar to every one. It is difficult to realize 
how inconvenient it would be to go back to primitive bar- 
ter, and do without money. Professor Jevons * says : 
" Some years since. Mademoiselle Zelie, a singer of the 
Theatre Lyrique at Paris, made a professional tour around 
the world, and gave a concert in the Society Islands. In 
exchange for an air from Norma and a few other songs, she 
was to receive a third part of the receipts. When counted, 
her share was found to consist of three pigs, twenty-three 
turkeys, forty-four chickens, five thousand cocoa-nuts, be- 
sides considerable quantities of bananas, lemons, and 
oranges. At the Halle in Paris, as the prima-donna re- 
marks in her lively letters, printed by M. Wolowski, this 
amount of live-stock and vegetables might have brought 
four thousand francs, which would have been good remu- 
neration for five songs. In the Society Islands, however, 
pieces of money were very scarce ; and, as Mademoiselle 
could not consume any considerable portion of the re- 
ceipts herself, it became necessary in the mean time to 
feed the pigs and poultry with the fruit." 

The difficulty of barter is that desires do not fit each 
other ; or, if they do, it is a very unusual coincidence. One 
man having a stove may want a book, eggs, quinine, or 
twenty things in all, and to make an exchange he must 
find some one who, while he has a desire for a stove, has 
all these twenty things to offer. This is very unlikely to 
occur. Says Mr. Jevons : f "To allow of an act of barter, 
there must be a double coincidence, which will rarely 
* " Money and Mechanism of Exchange," p. i. f Ibid., p. 4. 



yo EXCHANGE. 

happen. A hunter having returned from a successful 
chase has plenty of game, and may want arms and am- 
munition to renew the chase. But those who have arms 
may happen to be well supplied with game, so that no 
direct exchange is possible." The same writer tells of 
the difficulty experienced by Mr. Wallace, the naturalist, 
in the Malay archipelago. Because " there was no proper 
currency, he could not procure supplies for dinner without 
a special bargain and much chaffering upon each occa- 
sion. If the vender of fish or other coveted eatables did 
not meet with the sort of exchange desired, he would pass 
on, and Mr. Wallace and his party had to go without their 
dinner." 

69. If, now, there were one commodity which every 
one would be willing to take for his goods — a commodity 
so familiar to every one for its own value, and for its own 
power to satisfy a desire, that there would be no hesitation 
in taking or receiving it — that would obviate all these hin- 
drances arising from barter. It would act like a new and 
improved tool. Some such commodity has, in fact, been 
chosen by people in different parts of the world, and always 
it has been a commodity which the people of that 
district value highly. In Chinese Tartary they use 
cubes of tea closely pressed together, and the price of a 
piece of silk is so many cubes of tea in their money. In 
Abyssinia blocks of rock-salt are used ; and in many places 
furs have served the same purpose. Among our Indians, 
strings of wampum were employed as money. In Europe, 
long ago, cattle were used as money (and from the word 
pecus, "cattle," came the woxdpecunia, and our word "pe- 
cuniary"). Some metal has, however, been found to be 
more useful for this purpose. We hear that in very poor 
countries, like Sparta, iron was used ; then copper came 
into common use ; but as people grew richer they needed 
a metal which had greater value, and by common consent 
they began to adopt silver and gold. These metals had 



MONEY. 71 

been wanted and manufactured into ornaments or dishes 
for their own sake before they were generally used as 
money. At first, silver, as the cheaper metal, was the one 
most commonly adopted as money, and it has continued in 
use as the principal money of commerce even to the pres- 
ent century; but since 1850 gold has become more plen- 
tiful, and it has consequently come into more general use. 
70. The reasons why gold and silver serve the 
purpose of a money best are very clear, (i) Suppose 
that, having a pearl, I want to get a basket. Of course, a 
pearl is worth many baskets. I might say io myself that 
I can exchange my pearl for something which everybody 
wants, and then take only a part of that thing and buy my 
basket ; and I might select bread as something which every- 
body wants. So I get three hundred loaves of bread, and 
with ten of them buy my basket ; but, unless I use the re- 
mainder of my bread at once to buy other things with, it 
will spoil, and I shall lose it all. This leads us to see that 
the commodity we use as money should be imperishable ; 
and this is one reason why gold and silver are chosen. 
They are very durable. Then (2) the precious metals are 
divisible into any fractions without loss. You can thus 
exchange a valuable horse for gold, and then with only a 
small piece of this gold get some less valuable commodity, 
retaining a large part of the price of the horse. This is why 
gold is coined into pieces of given weight, each having a 
different amount. A ten-dollar gold piece can be melted 
up and made into ten one-dollar pieces without losing its 
value ; or smaller pieces can be united into larger ones. In 
this way advantage is taken of the divisibility of gold and 
silver. (3) If bread were used as money, a small value in 
it would be very bulky. This is not true of the precious 
metals, and less true of gold than of silver. They are 
portable, and contain a great value in a small bulk. (4) 
Also, every one has learned what gold and silver look like ; 
they are cognizable. People know the difference be- 



72 



EXCHANGE. 



tween gold and brass ; but how many know what platinum 
looks like, and who could tell it at a glance from another 
metal. This quaHty in gold and silver makes them very 
desirable for money which is passed from hand to hand 
in ordinary dealings. 

71. After people had adopted the habit of using gold 
and silver as a medium of exchange, it was a great gain 
to have some authority so stamp the two metals that every 
one could know just how much each piece weighed, and 
how pure the metal was. If some authority, like a gov- 
ernment, which could be trusted, had not done this, the 
seller would be obliged to weigh each piece of gold at 
every bargain, and test its purity. It would, of course, be 
intolerable to be obliged thus to test every coin, and there- 
fore the Government establishes a mint, where it changes 
gold and silver bullion into round pieces, each of which 
must invariably contain a particular number of grains of 
gold or silver, and of a specified purity. This is coining", 
and each coin is given a name. At this time the United 
States calls 23.22 grains Troy of pure gold a dollar (and 
to the pure gold they add alloy to harden the gold, so that 
the gold and alloy together weigh 25.8 grains). The pure 
metal plus the alloy makes the " standard " weight. Our 
gold and silver coins now all contain one tenth alloy. We 
also coin 371J grains of pure silver {^\\2\ grains "stand- 
ard " weight), and call it a dollar. The United States 
makes no charge (which is called seigniorage) for coin- 
ing gold and silver. It is quite evident from this that the 
name dollar does not always have the same value, although 
people often think it does. We get into the habit of using 
names without thinking what they really mean. The 23.22 
grains in a gold dollar may be exchanged sometimes for 
more, sometimes for less, of other commodities; when it 
is exchanged for less, its value has fallen relatively to all 
other commodities, and, even if the name dollar remains 
the same, its value has fallen. One must then offer more 



MONEY. 



73 



dollars than before for the same commodities. That is, 
when money falls in value, prices rise ; when money rises in 
value, prices fall. 

72. To this point have we been brought in explaining, 
first, the function of money as a common denominator (or 
measure) of value ; and, second, that of a medium of ex- 
change. Now we shall say a few words in regard to another 
function, a means of paying long contracts, or debts 
which run over a long term of years. Suppose that I 
loaned you in 1880 one thousand dollars for twenty years. 
In that year the thousand dollars bought a certain quan- 
tity of corn, wheat, sugar, salt, wood, hats, and shoes. 
Now in 1900, when you are to pay me back the thousand 
dollars in money, if prices have changed, you may give me 
back the same amount of money, but you will not return 
to me the same purchasing power over other things. If 
for some reason prices have fallen between 1880 and 1900, 
it will take less money to buy the same quantity as before 
of corn, wheat, etc. If so, the thousand dollars you return 
me in 1900 will be of more value than the thousand dol- 
lars I gave you, and it would be unjust to oblige you to 
give me more than you borrowed. If, on the other hand, 
prices have risen, then the thousand dollars in money 
would buy me less than before, so that I should lose while 
you would be the gainer. Now this is wrong. Every man 
ought to give back just what he borrowed ; no more, no 
less. A creditor or a debtor is at the mercy of events over 
which he has no control — such as great changes in the pro- 
duction of gold and silver, or the effect of new inventions. 
A great change, for example, took place about 1850, when 
gold was discovered in abundance in California and Aus- 
tralia. How great this has been may be seen in Chart II. 
The relative amounts of gold and silver produced in two 
different periods are shown by the relative size of the 
squares. Thus, in the years since the discovery of Ameri- 
ca down to 1850, there was less than one half as much 
7 ■ 



74 



EXCHANGE. 



gold as silver produced ; but, in the forty-five years after 
1850, as much, and three fourths more, of gold was mined 

Chart II. — Relative Production of Gold and Silver before and 

after i8jo. 



-^^ 



VALUE OF GOLD § 

PRODUCED IN 

358 YEARS, 

1493-1850, 

$3,314,550,000, 



I 
I 



M 





VALUE OF GOLD 

PRODUCED IN 

45 YEARS, 

1851-1895. 

$5,863,099,850. 




PRODUCED IN 
45 YEARS, 
1851-1895 

$3,592,350,700 



than in the previous three hundred and fifty-eight years.* 
This shows what natural changes can take place in the 

* The chart is based on the following figures mainly from Dr. 
Soetbeer : 



PERIODS. 


Gold. 


Per ct. 


Silver. 


Per ct. 


1493-1850 

1851-1895 


$3,314,553,000 
5,868,099,850 


31 
62 


$7,358,450,000 
3,592,350,700 


69 

38 


Total 


$9,182,652,850 




$10,950,800,700 





MONEY. 



75 



supply of the precious metals, uncontrolled by the laws of 
any state. Although we have heard a great deal about 
the vast production of silver in late years, almost twice as 
much gold as silver (in value) has been produced in the 
last thirty-three years. At other times in the history of the 
precious metals- — once soon after the discovery of America, 
and again at the end of the last century — so much more 
silver than gold was produced that its value was lowered 
each time. Causes affecting the supply of both gold and 
silver, therefore, do not always remain the same. Besides 
these changes, prices may fall owing to improvements in 
the methods of producing commodities. 

73. As we have seen, value is a ratio. The value 
of money is a relation of money to all things which are 
exchanged for it. A change in any one of the thousands 
of articlea for which money is offered every day modifies 
the relation between money and other things. Changes in 
the way of making commodities are constantly going on ; 
so that the amount of every article which is exchangeable 
for any given quantity of gold is always varying. Hence 
the value of money (gold or silver) does not remain the 
same for any length of time; and the precious metals, 
while they are very satisfactory for exchanges which do 
not take very long to complete, can not serve as a 
proper measure of value during a long term of years. 
In a garden, well planted with trees, one evergreen was 
by far the tallest of all ; but in a few years there was a 
great change. Some of the trees had not grown much, 
while others had shot up marvelously. The former rela- 
tion of the trees to one another and to the tall evergreen 
was entirely changed ; in fact, several were almost as high 
as the evergreen. Likewise the relation of commodities 
to the precious metals is constantly changing, and there- 
fore gold and silver can not serve as a measure of value 
for long periods. Nor is there another article any better, 
or even so well, adapted for this purpose. 



1^ 



EXCHANGE. 



74. One way suggested to get a standard of payment 
for long contracts is by a device known as the mul- 
tiple standard. A long contract, like a government or a 
railway bond, ought not to be settled by paying back the 
amount of gold or silver borrowed, but by giving the lender 
a sum which would, at the time of repayment, purchase 
the amount of commodities for which the money loaned 
could have been exchanged at the time that it passed from 
the lender to the borrower. If we should keep a price-list 
of a large number of articles in common use, and see just 
how much money it would require to buy a fixed quantity 
of each of these things, then we could make a unit out of 
that amount of purchasing power, and give it back (ex- 
pressed in money), no matter whether it were to take more 
or less money. This can be better shown by the actual 
facts, as exhibited by the prices * of certain necessaries of 
life in New York markets : 



ITEMS. 



1 bbl. corn-meal 

2 bbls. flour .... 

1,000 bricks 

500 feet lumber, . 

1 ton coal 

20 lbs. cotton. . . , 
\ ton hay , 

2 cwt. ice 



1 cv/t. pig-n-on 

2 pair shoes 

100 lbs. beef 

100 lbs. pork 

30 lbs. butter 

10 doz. eggs 

10 bushels potatoes 

40 lbs. rice 

I bushel salt 

100 lbs. sugar 

I cord wood 

10 lbs. wool 



Total (I " multiple unit "). 



1876. 


1880. 


1884. 


$3 68 


$2 80 


$3 24 


12 42 


II 76 


II 18 


7 72 


7 78 


7 59 


7 65 


7 40 


8 53 


5 53 


3 47 


4 70 


2 58 


2 30 


2 10 


8 90 


7 52 


9 16 


34 


30 


23 


I 34 


2 06 


I 28 


5 60 


4 68 


4 80 


9 00 


8 80 


9 93 


10 60 


6 20 


7 90 


7 20 


5 10 


5 40 


2 80 


I 60 


2 10 


6 12 


7 50 


6 75 


2 84 


2 92 


2 40 


36 


30 


39 


10 70 


9 00 


7 10 


2 98 


2 98 


3 58 


3 30 


3 80 

$98 27 


3 00 


$111 66 


$101 33 



* Newcomb's " Principles of Political Economy," p. 211. 



MONEY. 



77 



Now, if a government commission should collect and 
publish the prices of a large number of commodities in 
this way, we could know just how much money was neces- 
sary to get the same purchasing power at different times. 
In the table above, in 1876, $111.66 were required to ex- 
change for the same quantity of goods as could be bought 
by $98.27 in 1880. From such a table, if honestly pre- 
pared, we could get a standard for long contracts. 
Suppose I had loaned you $11,166 in 1876, to be repaid 
in 1880. That bought in 1876 one hundred times as 
many goods as are included in the table above, or 100 
"multiple units." But in 1880, if it is understood that I 
am to receive back the same amount of purchasing power, 
or the same value in other commodities, I ought to receive 
from you only 100 "multiple units" as before. A "mul- 
tiple unit " in 1880, however, could be bought for $98.27 ; 
therefore, if you give me in money 100 X $98.27, or 
$9,827, I shall receive all I can justly claim, even if I 
did give you $11,166. For $9,827 of money in 1880 will 
have the same purchasing power that $11,166 had in 
1876. Neither you nor I had the power to control the 
change in the purchasing power of money between 1876 
and 1880 ; and so neither of us ought to suffer for it. If 
you were obliged, as you would be under the present busi- 
ness arrangements, to pay back $11,166 in 1880, you would 
be giving me back more purchasing power than you re- 
ceived (or about 113 "multiple units" instead of 100). 

75- It must now have distinctly appeared that money 
is mainly an instrument of exchange, a machine by which 
goods are transferred in a way to suit the convenience of 
those among whom the goods are distributed. It has been 
devised to save us from the great inconveniences of barter. 
Even when it serves as a common denominator of value, 
it has no more use than a yardstick. On the other hand, 
when money is used as a medium of exchange, an in- 
crease in the quantity of money by which goods are 



78 EXCHANGE. 

exchanged does not in any way increase the quan- 
tity of the things which are transferred by its 
means. Money is a means of getting from one com- 
modity to another ; just as a railway-car is a means of 
transportation from one place to another. It is absurd to 
suppose that an increase of cars would increase the amount 
of goods carried ; and so it is just as absurd to think that 
an increase of money can increase the things which are 
exchanged by its instrumentality. Money is like a stair- 
way from one story to another ; it is a means to an end, 
not the end itself. To increase the quantity of money by 
which goods are exchanged is simply to offer more money 
than before for the same goods ; but he who sells the 
goods for more money (that is, for higher prices) will 
have to pay more for the goods he buys, and he is no 
better off than when there was less money. If a milkman 
counts each quart of milk he leaves at the house by one 
notch cut in a stick, does it increase the number of quarts 
of milk he gives, if he chooses to cut two notches in the 
stick for each quart ? In that case he merely uses two 
notches to count where one served before, and that is all. 
So, if I sell a bushel of wheat for two dollars instead of 
one, and then give two dollars instead of one for a plow- 
share, I am no better off than before. Before the increase 
of money and the rise of prices, I sold the wheat for one 
dollar, and with the one dollar bought the plowshare. 
The wheat was equal in value to the plowshare in either 
case. A man has no more purchasing power when prices 
are high than when prices are low ; when prices are high, 
he uses more money as " counters," in which are estimated 
the value of his goods relatively to money, just as when 
the milkman used two notches instead of one. There are 
no more goods in existence, and no one is the richer, be- 
cause prices are high. 

76. Some people say : *' Well ! a dollar is a dollar, and 
you cannot make it anything else," implying that what is 



MONEY, 79 

named a '' dollar " is always equally good because it is so 
called. This is utterly fallacious. Suppose that we agreed 
to call 23.22 grains of pure gold a " dollar " (as is the case 
now). On this supposition a bushel of wheat, for example 
may be exchanged for this dollar, or 23.22 grains of gold. 
But, if the state were to take out twenty per cent of the 
gold and leave only 18.576 grains in the dollar, would the 
wheat bear the same relative value to the 18.576 grains 
that it did to the 23.22 grains? Certainly not. If the 
" dollar " is lowered in value, it is implied, as we have seen, 
that the wheat has risen in value. Then, of course, the 
dollar has not remained the same. A dollar is only 
a name for a given quantity of gold or silver ; and, since 
gold or silver can change in value, certainly the dollar can. 

To be sure, a man who had a debt to pay might like to 
have the dollar lowered ; for then his goods would sell for 
more of the cheapened units, and these cheapened units 
may be as good as the old ones as a legal payment for his 
debt. In this way he could relieve himself from paying 
the full amount of his debt without violating the law. But 
this is nothing more than to attempt to steal — to cheat the 
man who loaned him the means, which he made a promise 
to repay in full. No condemnation can be too severe for 
this kind of monetary dishonesty. It is bad policy, too, 
for the next time such a man wishes to borrow, he will not 
get a loan so easily. Any business-man who fails to meet 
his engagements will be distrusted by the rest of the busi- 
ness community. 

77' Having now discussed the nature and uses of 
money, it will be easy to distinguish between wealth, capi- 
tal, and money. Many persons, without thinking, might 
say that capital was the money a person had, or that his 
money was his capital or his wealth. These ideas are 
wholly wrong. We can return to our diagram in section 
35. Circle A represents by its area wealth ; that part of 
wealth which is used in the production of other wealth is 




8o EXCHANGE, 

capital, and is represented by the area of circle B. Now 

gold and silver have value, and are included in the wealth 

of a country, but not all money is used in exchanging 

goods to be employed for the production of other wealth. 

If so, then that part of money can not 

be called capital. It is wealth, but 

not capital. If the area of circle C 

represents the amount of money in 

a country, part of it lies within and 

part of it without circle B. That is, 

some money is capital, and some is 

not. When you take a gold dollar 

and offer it for a pair of kid gloves, 

which are purely a luxury, and the use of which does not 

aid in making anything else, the money is not used as 

capital. But, if a gold dollar is exchanged for a hammer 

to be used in building a house, it is capital. 

The distinction between money and wealth is thus well 
explained by Mill : " Money as money satisfies no want ; 
its worth to any one consists in its being a convenient 
shape in which to receive his incomings of all sorts, which 
incomings he afterward, at the times which suit him best, 
converts into the forms in which they can be useful to 
him. The difference between a country with money and 
a country altogether without it would be only one of con- 
venience ; a saving of time and trouble, like grinding by 
water instead of by hand, or (to use Adam Smith's illus- 
tration) like the benefit derived from roads ; and to mis- 
take money for wealth is the same sort of error as to mis- 
take the highway which may be the easiest way of get- 
ting to your house or lands for the house and lands them- 
selves."* 

78. Exercises. — i. If you want to put a nail through 
a board, you use a hammer to drive it in. If you have a 
telescope, and want to exchange it for other things, one of 

* " Principles of Political Economy," vol. i, p. 23. 



MONEY, 8i 

which is a book, what tool do you use to perform the 
operation ? Could you do it very easily without some tool 
of exchange ? 

2. By the use of money how could you determine how 
much more valuable the telescope was than the book? 
What term would you apply to this use of money ? 

3. If gold were to become as cheap as copper, would 
it be as well fitted for money as now ? Why not use peb- 
bles for money ? 

4. It is said that money is a labor-saving machine. 
Explain in what manner money saves labor. (Consider 
the waste of time in barter.) 

5. If there were no money, how would a man who 
made only rivets for pen-knives get along.? 

6. If two things have the same price, do they have 
the same value ? What is the difference between price and 
value } 

7. Would you take a French as readily as an American 
coin 1 Should you know how much gold was in the French 
coin, or how many dollars it was equal to ? Is it of any 
advantage to have our own coins ? 

8. If money falls in value, what effect is produced on 
prices ? 

9. Why is it unjust to agree to pay a debt in money 
which does not fall due for very many years ? If the same 
amount of money that was borrowed is paid back, is not 
that just ? 

10. Does changing bullion into coin increase the wealth 
of the country ? Was the bullion wealth before it was 
made into round disks, called coin ? Is the wealth greater 
because there is more coined money in use ? 

11. When have there been great changes in the supply 
of gold or silver ? 

12. If in 1870 I agreed to pay $1,000 in 1880 for 
money I borrowed, and if the "multiple unit" in 1870 
could be bought for $125, how many "units" should I 



82 EXCHANGE, 

pay back in 1880? If in 1880 the unit could be bought 
for $110, how much money ought I in justice to return ? 

13. If payment of debts were excluded from considera- 
tion, would it make a difference whether we had more 
or less money in our country ? Would the higher or lower 
prices, if general, make a difference to any one but debt- 
ors and creditors ? If the multiple standard were in use, 
need we care much about the quantity of money ? 

14. Is a carriage capital ? Is the money paid to a po- 
liceman by the city capital ? Consider whether the police- 
man is a productive laborer (see section 2iZ)- Is the money 
paid to a molder in a foundry capital ? Why ? 

15. Name some article which is wealth, but not capitaL 
Mention some use of money when it is not capitaL 



CHAPTER IX. 

HOME AND FOREIGN TRADE. 

79. To any one looking over a great city during work- 
ing hours, the confusion of noises and movement of people 
indicate a variety of occupations which, regarded as a 
whole, seem like an incoherent jumble, without method or 
purpose. Chimneys are smoking, machinery is rattling, 
wagons going in opposite directions are crowding the 
streets, and people swarm the footways. The complexity 
of business affairs seems hopelessly intricate, and we might 
possibly think that what we see is merely the result of 
chance. Every person is expected to choose an occupa- 
tion, and in one way or another take some part in this 
bustle of work or production. In short, all this marvelous 
world of trade exists to satisfy human wants. It is 
the result of efforts to get those things which satisfy our 
desires. And it is this seemingly complex organization of 
the business world which we are now to study. It is com- 
plex, because man has summoned to aid him in this strug- 
gle for wealth all the resources of invention, all the ac- 
cumulated skill of centuries, and all the results of civili- 
zation. This is also the reason why it is of such great 
interest. Ships, railways, warehouses, carts, express-wag- 
ons, stores, and their thousands and millions of labor- 
ers are doing the work of exchanging goods. It is not 
sufficient simply to produce in Vermont what a man wants 
in Texas. That must be carried to him and something 

(83) 



84 EXCHANGE. 

brought back. Cotton and woolen goods are rolled into 
Boston or New York by trains, shipped by steamer to Gal- 
veston, and cotton is carried back by water, or cattle are 
driven northward to be sent by rail to the eastern seaboard. 
Each man's goods must find a market — that is, they must 
find a man who wants them, and who, at the same time, 
can give in return articles desired by their owner or manu- 
facturer (see section 9). No one can make for himself 
all the things he needs. 

80. All this marvelous machinery of exchange, which 
has grown up by the slow experience of men, is due to 
the fact that men and places are differently adapted for 
different purposes ; or, in a word, it is due to division 
of labor. It has been found that, by confining themselves 
to one thing, persons can produce a greater total of wealth 
than if each person worked by himself and tried to pro- 
duce everything he wanted. For example, each man of a 
thousand, working by himself, might produce a barrel of 
flour, a pair of shoes, and a coat in a certain time ; and 
so the thousand men might produce one thousand barrels 
of flour, one thousand pairs of shoes, and one thousand 
coats. But if one third of them devoted themselves solely 
to producing flour, another third to shoes, and another 
to coats, they could, by this division of labor (to say noth- 
ing of being able to use machinery), produce a vastly 
greater amount in all than one thousand barrels of flour, 
one thousand shoes, and one thousand coats. It is no 
exaggeration to say that, with the stimulus of competition, 
with the inventions, and with the acquired dexterity and 
experience which familiarity with one occupation gives, 
they would produce ten, or a hundred, or a thousand 
times as much wealth as if each tried to produce all these 
things by himself. One hundred years ago, it is said, one 
person out of five was needed to supply the clothing of 
the people ; but to-day only one person out of two hun- 
dred and fifty is needed, and we have much more and 



HOME AND FOREIGN TRADE. 85 

better clothing now than then. It has been found, con- 
sequently, that, if each person selects one occupation, and 
works only in it, he can, by his increased product, really 
get more of the other things he wants. By producing 
more of one thing which others want, he can get in ex- 
change more of the things he himself wants. This truth 
is so generally acted upon that it causes a great diversity 
of occupations in every community. Indeed, no com- 
munity can reach the stage of civilization and the slight 
density of population which of itself leads to division of 
labor without having a great variety of employments or 
trades. In every little country village we find a black- 
smith, a carpenter, a shoemaker, a merchant, a physician, 
besides farmers and others. A physician, by devoting 
himself to the study of medicine, can gain more knowledge 
and skill than each person could get for himself while 
working in other ways all day long. By giving his serv- 
ices, he can get a blacksmith to shoe his horse cheaper 
and better than he could do it himself; he can buy more 
of the things he wants by what he earns in his practice 
than if he tried to make each thing himself. So it is with 
all the others. By looking at Chart III, on the next page, 
we can see the relative proportions of occupations in the 
United States, It will be observed that one very large di- 
vision — called trade and transportation — is engaged simply 
in exchanging the goods produced by those in the agri- 
cultural and manufacturing classes. This separation of 
employments, by leading each person to do only one thing, 
at the same time makes him more dependent on his neigh- 
bors, for it creates the necessity of exchange. If 
each person tried to produce all that he wanted, as Robin- 
son Crusoe did, there would be no reason for an exchange 
of goods with others. There would, in that case, be no 
busy cities, no steamers, no vast network of railways, and 
no great stores and warehouses. The reason why goods 
are exchanged at all is because every person can do some 



86 



EXCHANGE. 



Chart III. — Chart showing for the United States, itt i8go, the ratio 
between the total population over te7i years of age and the number 
of perso7is reported as engaged in each principal class of gainful 
occupations. Compiled from the returns of the Eleventh Census. 

Note. — The interior square represents the proportion of the popu- 
lation which is accounted for as engaged in gainful occupations. The 
unshaded space between the inner and outer squares represents the 
proportion of the population not so accounted for. 




(I.) Engaged in agriculture, fisheries, and mining 9,013,201 
(2.) " manufactures and mechanics . . . 5,091,669 
(3.) " trade and transportation 3,325,962 

(4.) " professional and personal services 5,304,829 

22,735,661 
Not so engaged 24,677,898 

Total population over ten years of age .... 47,413,559 




HOME AND FOREIGN TRADE. 87 

one thing better than many things by concentrating his 
power rather than by scattering it. All this is implied in 
selecting a profession or a trade. 

81. When we see that exchange of commodities is due 
to the separation of employments, or division of labor, and 
when we reflect for a moment on what a variety of de- 
sires each person has, we can begin to understand why 
the world of trade seems so complicated. One workman 
in a factory may make nothing but the screws used in a 
watch, and yet how many and various are his desires. It 
is really surprising to find out what such a man gets in 
return for working only on screws. " We do not think it 
remarkable to sit down to a table covered with articles 
from all quarters of the globe and from the remotest isles 
of the sea — with tea from China, coffee from Brazil, spices 
from the East, and sugar from the West Indies ; knives 
from Sheffield, made with iron from Sweden and ivory 
from Africa ; with silver from Mexico and cotton from 
South Carolina ; the apartment being lighted with oil 
brought from New Zealand or the Arctic Circle. Still less 
do we think of the great number of persons whose united 
agency is required to bring any one of these finished prod- 
ucts to our homes — of the merchants, insurers, sailors, 
shipbuilders, cordage- and sail-makers, astronomical-in- 
strument makers, men of science — before a pound of tea 
can appear in our markets." * By making screws alone, 
the workman gets some of all these things, and more be- 
sides. Indeed, so varied are each person's wants that it 
seems almost inconceivable that he should be able without 
fail to get every day or week, when he wants them, these 
many things in exchange for his single product. How is 
it arranged so that steamers coming from India bring him 
just the thing he wants, and in just the quantity? Neither 
the owner of the steamer nor the captain knows this par- 
ticular workman ; but they both do know that millions of 

* Bowen, " American Political Economy," p. 25. 



88 EXCHANGE, 

persons want spices or tea, and they are thus enabled, 
because so many want the same thing, to make the carry- 
ing of this article a special occupation in a system of di- 
vision of labor. By serving millions at once, they do it 
very cheaply for each individual consumer. 

82. The fact that each person confines himself to one 
occupation and that each person desires a great variety 
of things make the use of money as a medium of ex- 
change of the greatest necessity in exchanging goods con- 
veniently. We saw this in discussing the disadvantages of 
barter. Money is one of the means of making the separa- 
tion of employments possible, and is a help to a more 
civilized way of living. Separation of employments 
creates trade, or an exchange of commodities, 
and money is a means of facilitating the opera- 
tions of trade. (Later we shall see that credit devices are 
also a means for this purpose.) The moment exchanges 
are carried on by means of money, the words buying and 
selling are introduced. A man, for example, having a 
basket, sells it for money, and with the money buys pota- 
toes. His production of the basket is, however, the means 
by which he gets the potatoes through the convenient 
medium of money. He might by chance have found the 
person having potatoes who wanted a basket, and ex- 
changed with him without the intervention of money ; but 
we should not use the terms buying and selling in describ- 
ing this operation. Those words, as they are generally 
used, have some reference to money. The buyer is one 
who offers money for goods ; the seller is one who offers 
goods for money. The buyer is always one who, having had 
a commodity, has succeeded in exchanging it for money, 
and has become the possessor of that which is admitted to 
have universal purchasing power, and which any one will 
take from him in any quantity, large or small. He has 
really gone through the most difficult part of the process 
of exchange ; for, now that he has money, he will have 



HOME AND FOREIGN TRADE. 



89 



no difficulty in getting other commodities with it. The 
seller, on the other hand, is the one who is as yet only 
beginning the operation of exchanging the things he pro- 
duces or owns for other things which he desires. He 
must wait until he finds a person having money, or the 
common means of purchasing, who wants his goods. T-he 
seller is not generally in so favorable a position as the 
person who has already had his goods changed into money, 
and who has become a purchaser. If there are many pur- 
chasers for a seller's goods, he can exact a higher price ; 
but, if there are few, he will be apt to accept a lower price 
than usual. 

83. In reality there is no distinct separation of con- 
sumers from producers, except when we are looking at 
other employments from the point of view of only one em- 
ployment. Suppose that we represent each trade in the 
community by a letter of the alphabet. A, B, C, D, . . . 
X, Y, Z, It will be clear, at once, that A is working 
to produce something (for example, shoes) for B, C, D, 
. . . X5 Y, Z ; while B is producing something, say cloth, 
for A, C, D, . . . X, Y, Z ; and C is likewise producing for 
A, B, D, . . . X, Y, Z. With regard to A, who is a pro- 
ducer, B, C, D, . . . X, Y, Z are consumers, or A is a seller, 
while the others are buyers ; with regard to B, who is a 
producer, A, C, D, . . . X, Y, Z are consumers, or buyers ; 
and so on. To each farmer, or manufacturer, or store- 
keeper, all the rest of the world constitute the buyers ; but 
in reality, when we look at the community as a whole, just 
as we look at the whole of the trades expressed by all the 
alphabet, all are in one way or another producers and all are 
alike consumers ; all are buying and all are selling. It is 
only when we view separately each person's effort to get 
rid of his products for money that we get an idea of buy- 
ing and selling. It perhaps seems that a wealthy manu- 
facturer is always selling ; but in one form or another the 
whole of the money that he gets for his goods is ex- 



90 



EXCHANGE. 



changed for other goods. A large part is used in buying 
more material for his mill, to repair machinery ,^ or pay 
wages, and another part forms his profits ; but he does not 
eat this money. He spends it for goods in one way or an- 
other ; he pays it out for the expenses of his household, 
for horses, or books, or pictures. No one produces and 
sells simply to get money : we work to get money only for 
what the money buys. Money is merely a road — not the 
place to which the road leads. 

84. Since, therefore, each person who is producing is 
looking for a buyer, and since the buyers are scattered 
everywhere, it is a convenience for both buyer and seller, 
if some one spot is provided as a common place for meet- 
ing. A man having butter to sell may not know who 
wants butter, but, if there is a place where butter is taken 
to be sold, he will expect to find buyers there. Such a 
place is a market, or store. This is the way trade goes 
on. Originally people held fairs, such as the one described 
by Scott in the " Pirate," or such as are now held annually 
at Nizhni-Novgorod, in Russia, and at other places where 
buyers and sellers may meet. Every store is only a species 
of fair. A large dry-goods store in a city is a very large 
fair. Articles of all kinds are kept on hand, ready for the 
buyer. The reason that stores exist is that there is a sep- 
aration of employments. Merchants make it a business 
to open a place where certain goods are kept, so that pro- 
ducers may know where their goods can be offered, and so 
that buyers who want a particular thing can know where 
to go to get it. If each person supplied all his own wants, 
there could be no trade, and there would be no such thing 
as a merchant or a "business-man." But we have seen 
(sections 46-50) that it is an enormous gain to have a di- 
vision of employments, so that the existence of a class of 
men " in business " and trade, who keep stores where certain 
goods can be found by any buyer, is a natural consequence 
of the separation of employments. A great market where 



HOME AND FOREIGN TRADE. 



91 



a seller can find a buyer is a saving to both not only in 
time but in convenience. In European cities you will find 
fixed spots in the market-places where peasants bring their 
fruit, vegetables, and fish, and where buyers constantly go. 
So it is in many places in the United States. There is no 
difference in principle between a house in which thousands 
of packages of cotton and woolen goods are kept and a 
place like the square in Nuremberg where peasants gather 
to sell fruit and fish. The object is the same. The busi- 
ness-world, then, contains a vast number of " markets," or 
contrivances by which buyers and sellers can be brought 
together. It is in the occupations of producing goods to 
satisfy some desires, and in exchanging them, that the peo- 
ple are engaged whom we see in the noise and confusion 
of a great city, rushing about hurriedly and without any 
purpose that we can observe. It is a puzzling sight, be- 
cause of its seeming intricacy, but the object is not hard 
to understand. Of course, the detailed process by which 
the buyer and seller find each other differs with each par- 
ticular kind of goods, and to understand this practical 
method is what is meant when one speaks of "learning a 
business." This is something which can be learned only 
by experience. No science can teach this beforehand, and 
yet this thing, which may result, when successfully done, 
in " getting rich," is by some uninformed people wrongly 
supposed to lie within the province of political economy. 
This study, however, discovers the principles governing 
the exchange of goods ; but the actual means of carrying 
out the exchange is left to the "business-men." 

85. It is to be noticed, however, that those persons 
who become merchants, and devote themselves and their 
capital wholly to making it possible for producers to ex- 
change their goods, demand payment for their time and 
the use of their capital in this occupation. This is a charge 
which all people must pay who deal with merchants ; that 
is, one person sells his eggs to the merchant for 18 cents, 



g2 EXCHANGE. 

and the merchant demands from the buyer an increase, 
say, of 4 cents, as his profit. It is evident, of course, that 
the merchant must get the ordinary rate of payment for 
his capital and time, or he will give up the occupation. 
Yet a good many people think that these middlemen, who, 
like merchants, stand between buyers and sellers, are use- 
less, and the expense of supporting them unnecessary. 
If, however, they are unnecessary and costly, it is strange 
that the world continues to make use of them in in- 
creasing numbers. In fact, it must seem clear that, be- 
cause of a division of employments, some com- 
mon place of exchange like stores is needful, 
and that we can not get along without them. If each per- 
son were to try to find a buyer for his products, instead 
of finding one man who would do that for many persons 
(and so more cheaply for each), he would waste a great 
deal of valuable time and money. This is the reason 
why a vast number of the exchanging class are necessary 
to the production and distribution of wealth. Of course, 
if merchants were to become exorbitant or their methods 
wasteful and expensive, some cheaper means would be de- 
vised by which the same exchanges could be carried on. 
One such method has been devised in cooperative stores, 
which will be described later on (Chapter XXXII). 

86. Let us take one example of the way in which 
exchanges go on all around us. The man who makes 
only screws for watches is paid by his employer in money 
for his screws ; with the value of his screws now expressed 
in money he goes to a retail "market," where a merchant 
has brought together flour from Minnesota, spices and 
sugar from the West Indies, sago from South America, etc. 
There he breaks up the value of his wages into small parts 
by the use of money, and so gets that which feeds and 
clothes his family, and in just such quantities as he wants it. 
So with the manufacturer himself. He has advanced capi- 
tal as wages, materials, buildings, machinery, etc., to keep 



HOME AND FOREIGN TRADE. 



93 



the factory going. His capital is consumed, but it re- 
appears in the form of watches. He finds in watch-stores 
a market for his goods, and sells them for money ; and with 
the money he then renews his capital and keeps a profit 
for himself. The money is all exchanged for goods either 
in materials, wages, etc., or in supplies for his family. 
Money is in this case only a convenient way of exchang- 
ing watches for the objects of the manufacturer's desires. 
Here, again, money is only a road between the thing pro- 
duced and the thing desired. In a similar way this can 
be shown of all other employments. Later we shall see 
how bankers come in to assist in the same processes of ex- 
change (Chapters XIV and XXIX). 

87. The people of the United States, we now see, have 
a great variety of occupations, because it has been found 
that there is a gain in having some men engaged in one 
and some in another process of production. All men can 
not do all things equally well. By division of labor 
men are classified according to their ability and 
capacity. It would be absurd to make a great lawyer 
like Daniel Webster sweep out his office and run errands, 
because by his talents he could earn enough while a boy 
was running one errand to hire him for a year. No doubt 
the lav/yer could do the errand as well as, or better than, 
the boy; but he can confine himself to work which the 
boy or even most men can not do, and thus he can accom- 
plish more for himself and for the community in which he 
lives. In the same way, some places are better suited for 
one kind of production than for another. New England, 
with its thin, stony soil, can not produce wheat as well as 
Dakota, while Dakota can not as yet produce cotton prints 
as well as New England. So it would be as absurd to 
expect New England to give up making cotton goods and 
set to work growing wheat as it would be to make the 
great lawyer run errands. New England is acting on this 
principle of division of labor, according to places, 



94 EXCHANGE, 

every day : by making cotton goods in which its advan- 
tage consists, it gets a vastly greater quantity of wheat by 
exchanging its cotton goods for wheat than it would by 
producing wheat at home. It is hardly necessary to say 
that different parts of our country are differently adapted 
for producing the same things. It is a truism to say that 
no State in the Union is like ev'ery other State in its soil, 
its moisture, its extremes of heat and cold, its forests, its 
rivers, its mineral resources, and fuel. Every one knows 
this. This is the reason, then, why there is a separation 
of employments in the United States, according to natural 
advantages. At first, in a new State, when the inhabitants 
are few, they are chiefly engaged on the soil ; then, by a 
natural and inevitable step, as soon as population increases, 
the separation of employments begins. Carpenters, shoe- 
makers, doctors, lawyers, teachers, cabinet-makers, etc., 
appear. Some spot, probably, is found to contain rich 
deposits of coal, or iron, or copper ; consequently, the 
main occupation of the people there will be the mining 
and transportation of coal or the smelting and rolling of 
iron. Near Lake Superior copper was found in enormous 
quantities, and that gave a special character to the em- 
ployments of that region. With the copper they bought 
the other things they needed. They could get more of 
other things, because a day's labor would produce more 
copper in value than it would of grain or cloth. Lately, 
new and rich copper-mines have been discovered in Mon- 
tana, and this has reduced the special advantage of peo- 
ple near Lake Superior. The persons who want copper, 
however, should be able to get it cheaper if a new and 
superior source of production is found. In this way, then, 
we find that there is a separation of employments, owing 
to different natural resources, as well as to different capaci- 
ties among men„ One has but to consider where sugar, 
and cotton, and lumber, and tobacco can best be grown to 
see this truth. 



HOME AND FOREIGN TRADE. 



95 



88. If a farmer in Dakota, growing wheat, wants a 
piano, we can see how he gets it. One set of men in the 
United States are manufacturing pianos, while he grows 
wheat. When he wants a piano, why does he not make 
one himself.? The reason is plain. He would evidently 
waste a vast amount of time even in learning how to do the 
simplest work in connection with the keys or the strings, 
and when it was done, with perhaps 700 days' labor, he 
would have an inferior instrument. Suppose, however, he 
should set to work to break up more prairie soil, and sow 
more wheat. By 500 days of labor he might have 1,000 
bushels of wheat to offer to some one who, in a separate 
employment, had been making pianos all his life. He sells 
his 500 days' labor, in the form of 1,000 bushels of wheat, 
to a dealer for money, and with the money buys a piano 
In this way, by " sticking to his last," and doing the thing 
for which he was suited by experience and capacity, on 
land especially adapted for wheat-growing, an amount of 
wheat was produced in 500 days of labor which enabled 
him to buy the piano. If he had foolishly tried to make 
the piano himself when he might have been growing wheat, 
it would have taken him 200 days more (or 700 days) to 
produce an instrument which would never be mistaken for 
a piano, and which would not have had a perfect octave in 
it. By raising wheat, he produced directly, with the least 
possible exertion, that which bought the piano for him. 
He used seed, plows, and land in order to get a piano, 
instead of using piano-making tools ; for the reason that he 
could attain his object with less labor in the former than 
in the latter process. On the other hand, the piano-maker 
could not at the same time carry on his manufactory, buy 
land, learn how to raise wheat, and finally produce a crop 
of a thousand bushels as easily as the farmer could. By 
spending 400 days' labor he might make a piano, which 
would buy for him 1,000 bushels of wheat; but, if he 
should set to work growing wheat on his own account, it 



96 



EXCHANGE. 



might exact 800 days of his labor on the poor soil near 
his factory. Now see what the advantage is from division 
of labor : 



Farmer in Dakota. 



500 days' labor gives 1,000 bushels 

wheat. 
700 days' labor gives a piano. 



Piano-maker in New York. 



800 days' labor gives 1,000 bushels 

wheat. 
400 days' labor gives a piano. 



By spending 500 days of labor in wheat-growing, the 
farmer gets wheat enough to buy him a piano, which would 
have cost him 700 days of labor. By the principle of di- 
vision of labor, he saves 200 days of labor, or as much 
wheat (400 bushels) as he could produce in 200 days, by 
sticking to one industry. On the other hand, the piano- 
maker by 400 days of labor gets an instrument which buys 
him 1,000 bushels of wheat. If he had tried to produce 
the wheat himself, it would have taken 800 days ; con- 
sequently, he has saved 400 days of labor by the principle 
of division of labor. We can even count up the total gain 
arising from the separation of employments. If the farmer 
had produced the piano himself, and the piano-maker had 
grown the wheat, together 700 + 800 days of labor would 
have been demanded from them. But, if each produces 
that in which he has an advantage, only 500 + 400 days of 
labor is spent by both together ; and yet each has secured 
the same satisfaction of his own wants. Without separa- 
tion of employments, it took 1,500 days of labor to get the 
wheat and the piano for each ; with this separation, ac- 
cording to relative advantages, 900 days of labor accom- 
plished the same results. So it is in all the variety of 
trades in the United States. Whatever a man can 
best produce, in the least number of days' labor, owing 
to his capacity and training and the natural resources at 
his command, that he will use as the means of pur- 
chasing for himself, by trade with other employments, 



HOME AND FOREIGN TRADE. 97 

the many objects of his own consumption and use. 

The farmer in Dakota can best supply himself with cloth- 
ing, carpets, books, plows, and reapers by raising cattle or 
growing grain, simply on the principle of division of labor. 
All home trade, then, is the result of this separation of 
employments, 

89. If this farmer should want a silk dress from France 
for his wife, he would do exactly the same thing as he did 
in getting a piano. Why should he not produce the silk 
goods himself ? Simply because he would gain more by 
working with those conditions about him which are favora- 
ble for producing the most grain with the least number 
of days' labor. His wheat and flax are his best means of 
buying silk. In 100 days' labor he can produce, perhaps, 
100 bushels of wheat. But it may happen that silk can be 
produced in the United States. Then why should he send 
to France for it.? In the United States it requires the silk 
manufacturer, say, 120 days' labor to make 25 yards of 
this silk. In France, however, suppose 25 yards of silk 
can be made in 90 days, while it requires 115 days' labor 
in France to grow 100 bushels of wheat. France has 
an advantage in silk over wheat ; but in the United States 
there is an advantage in wheat over silk. Now here 
are conditions which fit each other, and lead to a trade 
which would be a gain to both the Frenchman and the 
American. By producing silk, the Frenchman can buy 
more wheat ; by producing wheat, the American can buy 
more silk. This is the same result which was reached be- 
fore in regard to people in the different industries of the 
United States. Each person, by doing one thing to which 
he was suited by training and natural resources, was en- 
abled thereby to buy more of other wealth. In the same 
way we can see how each may gain by the trade between 
France and the United States. The case of international 
trade is, then, no different in principle from that of do- 
mestic trade : 



98 



EXCHANGE. 



United States. 



loo days* labor gives lOO bushels 

wheat. 
120 days' labor gives 25 yds. silk. 



France. 



115 days' labor gives 100 bushels 

wheat. 
90 days' labor gives 25 yds. silk. 



Imagine a ship leaving the United States with 100 
bushels of wheat on board bound for Havre. It is found 
on reaching Havre that 100 bushels of wheat are produced 
in France by at least 115 days of labor, and so would 
be worth more than 90 days' labor in silk (nearly one 
third more). Consequently, the American wheat would 
buy more than 25 yards of silk (nearly one third more). 
With this silk the vessel returns to New York. Now what 
has been the use of going to France ? It is found that 
the wheat has brought back at least 25 yards of silk 
(leaving out the one third for freight charges), which in 
the United States would have required 120 days of labor; 
that is, 100 days of labor in the United States, when 
directed to producing wheat, would buy silk from France, 
after paying all expenses, which, if it had been produced 
in the United States, would have cost the farmer 120 
days of labor. He can thus save himself 20 days of labor 
by trading with the country which has an advantage in 
producing silk, when he, on the other hand, has an ad- 
vantage in producing wheat. Wheat and silk could both 
be produced in the United States ; but one required a 
less number of days' labor to produce than the other, 
and that is itself a reason for trade with France. The 
article which could be produced more easily by 
comparison with the other would be sent to France, 
and the other brought back. This is the reason for the 
existence of all foreign trade, and is a very important 
principle, 

90. But, if we think a moment, we see that the same 
principle determines all home trade. It is simply the 



HOME AND FOREIGN TRADE. 



99 



result of division of labor which is the cause of all 
trade, both home and foreign. The people and coun- 
tries of the world produce various things with different 
degrees of ease; England has cheap coal and iron, France 
produces silk and wine cheaply, Germany produces linen 
successfully, the United States yields cotton, tobacco, and 
provisions at a low cost. Owing to this division of labor, 
arising from the natural resources of different places, 
or from the peculiar training and qualities of a people, 
there is a separation of employments, just as in all trade 
within the United States. A person in our country natur- 
ally wishes to take his goods where he can get the most for 
them, and that is where the things he wants are produced 
at the least cost. When he brings back the products of 
other lands, he does not want to have any regulations inter- 
fere to take away a part of his gain from the foreign trade, 
and give it to some one else. On one farm A has land 
which yields potatoes with excellent results ; he gets loo 
bushels from an acre, but he can raise only i8 bushels of 
oats. Next to him is a farm owned by B, whose land gives 
him 40 bushels of oats to an acre, but only 20 bushels of 
potatoes. Would it be better for A to grow potatoes entire- 
ly, or use some land for oats ? Let us see. Potatoes sell, 
we will suppose, for 80 cents a bushel, and oats for 50 
cents. At these prices A could get $80 an acre from 
potatoes, but only $9 if he raised oats. B, however, gets 
$20 an acre for oats, but only J16 from potatoes. By de- 
voting an acre to potatoes, A could get $80 in money, or 
enough to buy 160 bushels of oats from B ; when, if A had 
been forced to grow oats, he could only have produced 
18 bushels. By producing that in which he has an ad- 
vantage compared with oats, A gets his oats at less cost 
to him. He would regard it as a great hardship, indeed, if 
any one were to draw an artificial line between the two 
farms, and say to A: "You must produce your own oats, 
if you want any" ; and to B : "You must raise potatoes, 



100 EXCHANGE. 

if you want any, and not grow oats alone, and with them 
buy potatoes from A. It is better that each man should 
do more things." But B says : ''I can buy more potatoes 
by growing oats than I can by using land suitable for oats 
in growing a scanty crop of potatoes. A gains likewise. 
I have less by this new rule ; and A has less. It is rank 
injustice. I do not wish you to interfere, if interference 
means such a mistake as this." He would most likely say 
the same thing if A were in France and B in America, 
for home and foreign trade are carried on in accordance 
with the same rules. Each arises solely from division of 
labor. 

91. By this explanation we see why it is that a gain is 
derived from exchanging goods with foreign countries. It 
seems, at first glance, as if the freight on goods brought 
from such distant places would be so much as to deter 
people from trading there. The gain is, of course, greater 
than the charge for freight, or such trade would not go on. 
As it is, our foreign trade amounts annually to, perhaps, 
$1,500,000,000. Goods to that amount would not be ex- 
ported and imported, if there were a loss in the trans- 
action. Our foreign trade is, moreover, increasing. The 
real gain is that by sending away our cheapest exports we 
get more imports than we could get for the same labor at 
home. As Mill says : " A country obtains things which it 
either could not have produced at all, or which it must 
have produced at a greater expense of capital and labor 
than the cost of the things which it exports to pay for 
them." He also says : " Setting aside its enabling coun- 
tries to obtain commodities which they could not them- 
selves produce at all, its advantages consist in a more 
efficient employment of the productive resources of the 
world. If two countries, which traded together, attempt- 
ed, as far as was physically possible, to procure for them- 
selves what they now import from each other, the labor 
and capital of the two countries would not be so produc- 



HOME AND FOREIGN TRADE. loi 

tive, the two together would not obtain from their industry 
so great a quantity of commodities as when each employs 
itself in producing both for itself and for the other the 
things in which its labor is relatively most efficient. The 
addition thus made to the produce of the two 
combined constitutes the advantage of the 
trade." * This, also, is the explanation of the gain in 
all home trade. The gain is not in what we give, but in 
getting what we receive at a lower cost than if produced 
at home, or by ourselves. 

92. Exercises. — i. A cooper is making barrels. By 
what means can he pay the expenses of his son at school .'' 
Does he use barrels for this purpose } 

2. Do you know of any person who produces all the 
things he uses .'' Does a hunter ? Did he make his tin 
cup.? 

3. Why does a tailor go to a shoemaker when he needs 
a pair of shoes.? How does he pay him? Could he pay 
him, if the shoemaker did not want work done by the 
tailor ? 

4. Why is it that the cargo of an ocean steamship 
coming to the United States is generally made up of a 
great variety of articles ? Why should not all the imports 
be of one kind ? 

5. A farmer came into a store in town and exchanged 
calico for his eggs. Was he a buyer or a seller ? If he had 
sold his eggs the week before for money, and now offered 
the same money for calico, would there be any difference 
in the trade ? 

6. One manufacturer is producing stoves. Who are 
his consumers ? Is he a consumer of anything ? If so, 
can he be a consumer and a producer at the same time ? 
Mention, if you can, a producer of something who con- 
sumes nothing. When a pencil is made, is anything con- 
sumed ? 

* "Political Economy," Book III, chap, xvii, §§ 3, 4. 



I02 EXCHANGE. 

7. Why is it that a country store keeps a little of 
everything, while in cities stores very often contain but 
one kind of thing, as a china store, a bird store, a sta- 
tionery store ? 

8. Why is it right that a retail merchant should charge 
a higher percentage on the price of the goods he sells than 
the wholesale merchant ? Even if a retail dealer does a 
small business, must he not have a store open all the time ? 

9. A boy bought a stylographic pen made of rubber. 
His father gave him the money. Lately his father, a law- 
yer, had successfully won a suit for a maker of colored 
beads. The maker of the pen brought the rubber from 
Africa. Trace the various steps by which the exchange for 
the pen and the money was effected. Was the bead-maker 
paying the natives who collected the rubber in Africa ? 

10. Some mountainous districts of Alabama are found 
to contain rich deposits of coal and iron. If the people 
there want carpets, what is their best way of satisfying 
that want? Would coal-miners make carpets as well as 
they are made in factories built for that purpose ? 

11. Why should a Texas ranchman send his cattle to 
the East, and with his money buy clothing to take home ? 
Why could not each ranch have a woolen-mill or a tailor- 
shop ? Why should not each ranch also have a physician, 
a teacher, a shoemaker, a carpenter, a sugar refinery, a 
rolling-mill, and a button-factory ? 

12. Why is it that trains go in opposite directions car- 
rying goods ? Does a railway company generally carry 
loaded cars in one direction, and bring back empty cars 
in the other direction ? 

13. In a mining region mention some of the things 
which are probably brought by the railways to the district, 
and what is carried away. 

14. Would the great ocean steamships be built, if each 
country were as exclusive as China, and shut itself in with 
a wall ? 



HOME AND FOREIGN TRADE, 



103 



15. Would a State be richer if it had no railways or 
steamboats ? Why is it that a district " builds up " when 
a railway passes through it ? 

16. Think of something which we send abroad, and of 
something which we import from abroad. Then state what 
are the advantages enjoyed in the production of the thing 
we export. Try petroleum or provisions as exports. 

17. Is the United States richer for its foreign trade? 
If we were forbidden to import anything, would it cost us 
more to produce at home the things we now import ? Why 
are they now imported ? If a country gets more wealth by 
importing a few things, why would it not gain by importing 
many things? Would people import, if there were no gain 
in it ? If there is a gain, why should it not be allowed ? 
Ought not imports to be increased, if it is desired to in- 
crease a country's wealth ? 



CHAPTER X. 

DEMAND AND SUPPLY. 

93« We have seen that men who have stores and ware- 
houses, those who are engaged in transporting goods to 
and fro by wagons and railways, are all devoted to the 
task of exchanging goods, so that men from the results of 
their own work can get in exchange the things they want. 
Though we have learned that goods are everywhere ex- 
changed in vast quantities, we do not yet know by what 
general rules these exchanges are governed. Why is it, 
for instance, that a pine table may be exchanged for five 
bushels of wheat ? Why should it not be exchanged for 
only one, or for one hundred ? Why may a table made of 
mahogany, of exactly the same design, be exchanged for 
five pine tables ? In exchanging goods, we are comparing 
a quantity of one article with another ; that is, fixing their 
exchange values relatively to one another, and so we are to 
seek the laws which regulate the values of com- 
modities which are exchanged against one another. We 
must now try to discover why it is that one thing may be 
exchanged for more or for less of another thing. 

94. It must be understood, however, that in this and 
the following chapters (from X to XII) we take it for 
granted that competition is free. By this is meant that 
nothing exists to prevent each person from satisfying his 
economic wants in the quickest way, or along the line of 

least resistance ; that, if labor is more highly paid in one 

(104) 



DEMAND AND SUPPLY. 105 

industry or in one place than in another, laborers will be 
able to move at once, and take advantage of the fact; 
and that capital, likewise, both knows and seeks its own 
advantage by going where it can get the highest profit ; 
that is, when free competition exists, we say that there is 
nothing to interfere with the free migration of labor and 
capital. We must also understand by it that people do not 
follow customs and traditions which interfere with the nat- 
ural exercise of their impulses. Competition, to be sure, 
does not always exist ; but for the present we are search- 
ing for the laws which govern values in the long run, and 
in permanent conditions, and we shall assume that it does 
exist. Later we shall take other influences into account. 

95. If A has money and B a coat, and a trade is tak- 
ing place, we can easily see that, if A is very anxious for 
the coat (because it may be essential to protect him from 
the cold in work out of doors), he may raise his offer of 
money for the coat until, because of A's eagerness, B gets 
a better bargain. On the other hand, if A held off, and 
B seemed very anxious to sell, and, rather than not dispose 
of his coat at all, would sell it for less money, then A 
would get the better bargain. The price, then, would de- 
pend on the relative eagerness of A and B, the one to sell 
and the other to buy ; or, as it is called, on the demand 
and the supply. Here A represents the buying class, 
because he has general purchasing power, having already 
parted with his own produce for money ; and B represents 
the selling, or supplying class, who wish to exchange goods 
for general purchasing power. 

96. Yet we should keep in mind a distinction already 
made (section Z-^, that, if we assume a position where we 
can take in the whole industrial community, we can see 
that all are at once producers and consumers. Of course, 
no one can get money, or general purchasing power, un- 
less he has goods of value ; so that no one who has not 
produced, or does not control the production of wealth, 

9 



I06 EXCHANGE, 

can have a demand for other goods. All producers, there- 
fore, form the class, which, having goods, convert them 
into money, and so create a demand. As before said, if 
all industries are represented by the alphabet, A is produc- 
ing for B, C, D, etc. ; B, for A, C, D, etc. ; C, for A, B, D, 
etc. ; and so on. So, when we take all the industries to- 
gether, all are producers, and solely for that reason all 
can have a demand. This is true, however, only when we 
take demand in its general sense. 

So, also, of supply. A, B, C, D, etc., are all supplying 
something, and it is only because they can supply a thing 
that there can be any demand. In brief, when we look at 
demand and supply generally, we find that they are 
but two sides of the same thing. All our wealth is a sup- 
ply, and all our wealth is also a demand. 

97. We can from this see the error of those who talk 
of general overproduction. For, the more there is 
produced of things which others want (and for which 
others are willing to work in order to give things in ex- 
change), the more is the general supply increased ; but, 
if properly adjusted to people's wants, the more the gene- 
ral supply, the more people have to offer as demand. A 
produces in order to get the product of B ; and B pro- 
duces in order to get the product of A. If A and B both 
come to have more productive power, A and B can pro- 
duce more things, and so have the means with which to 
buy more things from each other, and so to satisfy a great 
many more desires than before. If this be true of all in 
the country, and all produce more, they will all have the 
means to buy more, and all can satisfy more wants than 
before. 

^ But, if it is clear that there can be no such thing as a 
gi^ieral overproduction of goods from increasing the sup- 
0a)n/dtk come about because people have more than 
aardntvtland.so do not create a demand, because there 
isl&iawklof idesiiie. for goods ? Think for a moment. Did 



DEMAND AND SUPPLY. 107 

you ever know a person, all of whose wants were satisfied ? 
Did you ever know of a community in history who had 
all they wanted ? If there is a lack of desire anywhere, 
why do the people go on producing ? People do not un- 
dertake arduous labor, unless they have some desire which 
can be satisfied by their productive power. They work in 
order to get something they want. Never before in the 
world's history were men producing as much as now. In 
fact, as civilization progresses, new desires come into ex- 
istence. 

98. It is, however, essential that only so much of a 
particular commodity should be produced as people want. 
Even though the productive power of a community may 
be increasing, by use of new machinery and by newly-dis- 
covered processes, yet some persons may not calculate 
correctly the quantity of a particular thing which other 
people (who at the same time are producing, and so have 
something to offer as a demand) want. In this case, there 
may be an overproduction of a particular com- 
modity. If there are several industries of which this can 
be said, it is then possible that some persons should sup- 
pose they see in it a general overproduction — which is im- 
possible. For, if the power to produce increases greatly, 
and if many industries suffer from overproduction, that 
means, of course, that the productive power is not proper- 
ly adjusted to people's wants. To use an illustration, in 
certain caves there are stalactites and stalagmites ; that is, 
drippings from the roof form long pendants, like icicles, 
hanging downward, and corresponding forms rise from the 
floor upward to meet those above. When there is over- 
production of a particular commodity, it is as if there were 
a stalagmite without a corresponding stalactite ; that is, 
that the persons who want the particular commodity, and 
have purchasing power, do not turn demand in this direc- 
tion, or who, because of a distrust of the conditions of 
trade, are not producing at all- Reciprocal production for 



108 EXCHANGE, 

reciprocal wants is necessary to properly-adjusted demand 
and supply. The business-world is all the time occupied 
in trying to make this adjustment ; but errors are often 
made, and so goods are often in supply greater or less 
than the demand. 

99. If, as is commonly the case, we are thinking of the 
demand and supply of a particular thing, then we 
see at once that demand comes from buyers only, or 
from those who offer money for the thing which they desire. 
Desires alone do not create a demand — '^ if wishes were 
horses, beggars might ride." Together with a desire, the 
buyer must offer purchasing power. Our ideas as to 
money now come in to help us. We see that men have 
money only because they first get goods of value, which 
they exchange for money (in order to be a buyer, one 
must first be a seller) ; that is, the possession of goods of 
some kind is the source of purchasing power, and of de- 
mand. Hence some people wrongly think that the quan- 
tity of money in existence is the only purchasing power, 
and that demand for goods is synonymous with the quan- 
tity of money. Since demand is seen to appear only in the 
form of money offered for goods, men often get exagger- 
ated and distorted ideas of the office performed by money. 
In truth, money (as a medium of exchange) is only like a 
bridge, by which we cross a stream from one bank to the 
other — it is a means by which goods get from one person 
to another. The seller brings his commodity and gets 
money for it, and with his money he straightway goes and 
exchanges it for goods again, or becomes a buyer through 
the intervention of money. The real object of the opera- 
tion was not to get money alone and keep that, but to get 
money so that one could conveniently buy the articles 
which satisfy one's wants. The supply is furnished 
by those who have the desired goods, and who at 
the same time wish to exchange them for money, 
or general purchasing power. 



DEMAND AND SUPPLY. 



109 



But it will be found that, when the supply of an article 
is very great as compared with the demand, it sells cheaper 
than usual ; and the lower price in turn brings out more 
buyers. By this we see that the amount of a commodity 
which can find purchasers depends on the price, or value. 
The cheapening of cotton goods has greatly increased the 
quantity which people consume. If they were to rise in 
price, there would be a less amount wanted than there 
is now ; that is, the supply which people want rises when 
the price falls, and diminishes when the price rises. As 
people's wants are constantly varying, there is a constant 
oscillation giing on in the market between demand and 
supply, and so there are constant changes in market prices. 
It will appear, however, that these fluctuations can not go 
beyond certain limits under the operation of demand and 
supply ; for a point will be reached where, if a less price 
were accepted by the seller, he would not get back what 
he has a right to expect in making the article. He will 
not do this usually or often. In the next chapter we shall 
try to find out what that point, or limit, is. 

100. Exercises. — i. What is the difference between 
the cause of the existence of value and a measure of value .? 
What is the difference between the cause of the existence 
of heat (as fire) and a measure of heat (as a thermometer) ? 

2. If I had a secret chemical process by which ink 
could be made well and cheaply, and were to gain large 
profits thereby, would you say that my profits were exposed 
to competition and regulated by it ? 

3. If I were the only man in my town who could man- 
age a bank well, would my salary be lowered by competi- 
tion of other persons? Would my wages be settled by 
competition ? 

4. Why is it that perishable ripe fruit sells at a lower 
price on Saturday night ? If market-men have accumu- 
lated a large stock of poultry, why is it sold cheaper when 
warm weather comes } 



no EXCHANGE. 

5. If a man were lazy and would not work, and if no 
one were to give him anything, how could he have any de- 
mand for goods ? How could he get his food ? What 
would he have to do before he could get money to offer 
for food ? If he succeed in creating a demand, has he at 
the same time increased the supply of something ? 

6. If all the manufacturers in all the industries of the 
United States were to take a whim to make axes and 
nothing else, why would that not be a good thing ? When 
a man goes into manufacturing, does he ever consider 
whether there is a limit to the amount which he ought to 
make of anything? Could he spread his factories over 
acre after acre without limit as to his market ? Why can 
he not do this ? 

7. Since the metallic money of the world is far less 
than the value of goods in existence, how is it that any 
man having goods can get money, and so create a demand ? 
Compare the case of a general commanding a hundred 
thousand men, on approaching a pass in the mountains 
through which only four men can walk abreast, and who 
is alarmed because all his men can not go through the 
defile at the same moment. The hundred thousand men, 
however, all get through the narrow pass. Are all goods 
offered for money at once .-* 

8. Why is it that, in good fruit years, apples are 
cheaper than in other years ? 

9. If hearses were to fall in price, would there be an in- 
creased demand for them 1 Would it be the same if woolen 
goods and flannels were to fall in price } When but a few 
of a thing are desired, does a fall in price affect the de- 
mand as much as when the article is in common use .'* 

10. What is the difference between a buyer and a pro- 
ducer } Can a producer be a buyer if he has not sold his 
commodity for money ? Which do you think stands in the 
more favorable position— the buyer or the seller ? Why ? 
Does not every seller soon become a buyer ? 



CHAPTER XI. 

COST OF PRODUCTION. 

101. In seeking to find out the laws of value, it will be 
convenient to classify commodities according to the possi- 
bility of increasing their supply, as follows : 

I. Articles whose supply is incapable of increase, 
or whose production is monopolized — e. g., Raphael's 
pictures, or a patented article. 

II. Articles whose supply can be increased, but at 
an increasing expense — e. g., grain (when the law of 
diminishing returns begins to act). 

III. Articles which are practically unaffected by the 
law of diminishing returns, and whose supply can be 
increased indefinitely at a diminishing rather than 
at an increasing expense — e. g., hammers, shovels, 
clocks. 

In this chapter we shall discuss the law of value of 
only the last class, which includes commodities of ordinary 
manufacture, and many of common use. 

102. In the beginning, however, we must clear away 
a possible confusion of ideas arising from the use of the 
phrase cost of production. Business men use it to ex- 
press the expenditure of money incurred in making their 
goods, exclusive* of their own "profit." Cost, however, 

* This corresponds closely with the idea conveyed by " cost of labor 

to the capitalist" in Mill's treatise, Book II, chap, xv, § 7 (abridged 

edition, Book II, chap, v, § 5). 

(.Ill) 



112 EXCHANGE. 

means sacrifice, and cost of production should mean 
the sacrifice undergone in production. In the manu- 
facture of a shoe, the man who furnishes capital, which he 
abstains from using for his own consumption, undergoes, 
on his part, a sacrifice of abstinence ; but he is not the 
only party to production. Labor, as well as capital, is 
essential to production; and the laborer's exertion, or 
physical and mental energy, is sacrifice to him. The sacri- 
fice, or abstinence, of a capitalist is, to be sure, a thing 
different in its nature and quality from the physical or 
mental sacrifice of a laborer, but both must be, taken into 
account in speaking of cost of production. In the or- 
dinary use of the phrase in the business world, the sacrifice 
of the capitalist only can be included in its meaning. 
This, of course, is an error ; and we shall use the expres- 
sion to describe the sacrifice of both the laborer and 
capitalist undergone in the production of an article. 
103. Let us take the simple case of a cabinet-maker 
making tables. First, before tables can be begun capital 
is necessary, in the form of lumber, tools, and a work- 
shop ; so that some one must have abstained beforehand 
in order to save this capital out of the results of past pro- 
duction. Some one, therefore, has chosen to abstain from 
wealth which he might have consumed for his own enjoy- 
ment. This giving up, this sacrifice, must be rewarded, or 
it will not be repeated. This is not a small matter. Think 
what it really means. Imagine that you own a horse, and 
are using it to plow your land. Now I come along and ask 
the loan of your horse (which is capital to you) to plow 
my own land. You know well enough that, if you give 
up your horse to me, your land must wait and your crops 
must suffer by delay; and you would never think of grant- 
ing my request unless you received from me a sum which 
would be a fair compensation for the losses you would 
suffer. If you consent to abstain from the use of your 
own horse, you must be paid for your abstinence, or 



COST OF PRODUCTION. 



113 



sacrifice. So it is with the cabinet-maker. He must re- 
ceive from the sale of his tables enough to pay him back 
his capital again, and also give him something for his ab- 
stinence while his capital was invested in lumber, tools, 
and workshop. 

104. Secondly, labor is necessary. The mere tools^ 
lumber, and workshop will not by themselves make a 
table ; the time, skill, and handicraft of the carpenter, or 
his energy as a laborer, are an essential part of the process. 
This exertion is a sacrifice to the laborer ; but it is, to be 
sure, a very different kind of sacrifice from that require'd 
in abstaining from the consumption or use of wealth. Yet, 
although different in kind, each is to be rewarded by a 
payment. Just as capital receives interest for the sacri- 
fice of abstinence, so labor receives wages for the sacri- 
fice of exertion. No one works month in and month out 
for the pleasure of working without any hope of recom- 
pense. The cost of production, then, of a commodity is 
the sacrifice involved in producing it ; and wages and in- 
terest are the sums paid as rewards for the various sacri- 
fices. 

105. This shows us that there is a vast difference be- 
tween the sacrifice to the persons engaged in production 
and the compensation paid for that sacrifice. The 
toil of the laborer which wearies his body is one thing, 
and the wages he receives for that toil is another ; to be 
cut off from the use of one's capital is one thing, and the 
compensation paid for that abstinence is another. Yet 
people constantly speak as if the " cost of production " of 
an article was the amount of wages or profits paid out. 
This ignores the fact that sacrifice is one thing, and re- 
muneration for that sacrifice is another. By considering 
" cost " as sacrifice, we give due importance to the sacri- 
fice of the laborer as well as to that of the capitalist. The 
way of looking at cost of production only from the capital- 
ist's standpoint leads to error. It is not a laborer's wages 



114 



EXCHANGE. 



that tire him out ; nor, when a man receives interest, does 
it cause him to suffer abstinence. 

I06. Where competition is free, although the sums 
paid as wages and interest can not measure the actual 
sacrifices, yet they will tend, on the average, to be in 
proportion to the sacrifices. We can find an illustra- 
tion in knife-making, where one man drills rivet-holes and 
another grinds the blades. In the latter work, minute 
particles enter the mouth and nostrils of the grinder, and 
it is known that he does not live as long as workmen in 
other departments. Now, if the same wages were offered 
for both kinds of work, every one would choose the safer 
and less disagreeable task ; and, as a consequence, no one 
could be got to do the grinding until the wages given for 
it were so much higher than for making rivet-holes that 
they would compensate the laborers (according to their 
own estimate, since they have free choice) for the greater 
sacrifice. So that, while it may be impossible to estimate 
or measure in dollars and cents the sacrifice undergone by 
a laborer, yet the payments of wages for two kinds of sacri- 
fice will, where competition is free, be (in the minds of the 

laborers themselves) in 
proportion to the degree 
of sacrifice. 

107. It is a mistake, 
iNTERisr then, to say that, be- 
cause wages and inter- 
WAGES est are high, cost (or 
sacrifice) of production 
is high (except in so far 
as the capitalist must 
abstain from more capital). Let two men employ equal 
amounts of labor and capital on two different pieces of 
land — one in Maine and one in S. Dakota. The same out- 
lay and labor will yield very different returns in these two 
cases : in Maine perhaps only 60 bushels of grain, but in 



25 


INTEREST 
WAGES 




75 




15 


45 



S. DAKOTA 



MAINE 



COST OF PRODUCTION, I15 

S. Dakota probably 100 bushels. If one fourth of the prod- 
uct goes to interest and three fourths to wages in both cases, 
then the same exertion of the laborers in S. Dakota gains 
for them a reward of 75 bushels of grain, and in Maine only 
45 bushels. Even though wages and interest are higher in 
S. Dakota than in Maine, no one would think of saying that 
the cost of producing grain was greater in S. Dakota than 
in Maine. On the contrary, we should say that the cost of 
production of grain was less in S. Dakota than in Maine ; 
and this properly means that, owing to the fertile soil of 
S. Dakota, the difficulties of production are less there than 
in Maine, or that the sacrifice involved in producing an 
equal amount of grain was less in S. Dakota than in Maine. 
In brief, where the cost of production is least, 
there wages and interest are highest. 

108. Since cost of production means the sacrifice of 
production, and since both labor and capital (the pay- 
ment for land can be omitted for the present, see Chapter 
XXII) are necessary to production, we may state the 
manner in which they enter into the manufacture of such 
a commodity as a table as follows : 

Capital Labor 

will be required for : will be that of ; 

1. Buildings and ground-rent.* i. Workmen. 

2. Taxes. 2. Manager. 

3. Insurance. 

4. Machinery. 

5. Materials. 
a. Of workmen. 



6. Wages 

( D. Of a manager. 

The cost of production will be greater, the greater the 
amount of capital required, and the longer it is needed. 
The wine-maker, for example, after growing the grapes, 

* For the meaning of this word, see section 234. 



Il6 EXCHANGE. 

making and bottling his wine, will let his product stand 
for some years to improve in quality ; and in that case 
the interest on his capital must be estimated according to 
the time the principal is invested, and the cost of produc- 
tion will be greater the longer the capital is abstained 
from. 

The cost of production, too, will be greater or less, ac- 
cording to the quantity of labor needed in making an 
article. In working ten days to make a table, more sac- 
rifice of labor is needed than if the same laborer made a 
chair in five days' labor. Of course, if skilled labor is 
employed, that will be equivalent to greater sacrifice to 
the laborer ; since the skill on the average represents train- 
ing and previous outlay by the laborer for his education. 

Cost of production of a commodity, then, va- 
ries with the quantity of capital abstained from, 
together with the time it is employed, and with 
the quality of labor engaged, together with the 
time it is employed. What the payments are for these 
sacrifices is another thing. 

109. Where competition is free, the wages paid for 
work involving the same sacrifice in different employments 
will be the same, and the payments for capital will be the 
same. We do not say that competition always exists ; 
but where it does, this is true. The charge for the use of 
capital, where the security is the same, would not be dif- 
ferent to different persons and industries. If it were, 
there would then be a migration of capital to the spot 
where it would earn more, and away from the spot where 
it would earn less, until the rates were equal — just as wa- 
ter, when nothing interferes, tends to seek a level. So with 
labor. If wages were higher in some places and indus- 
tries than in others, the tendency would be for laborers 
to migrate where wages are highest, and thus to equal- 
ize wages. If, then, there is the same sacrifice to laborer 
and capitalist involved in making a shoe and a hat, the 



COST OF PRODUCTION. 117 

payments for the sacrifice should be the same in each 
case ; that is, the wages and interest would amount to the 
same sums in each case. When this happens, it is clear 
that the two articles will exchange equally for each other ; 
the value of the shoe will be equal to the value of the hat. 
Therefore, where competition is free, commodities 
exchange for each other in proportion to their 
cost, or sacrifice, of production. This is the law of 
normal value of manufactured goods, or articles un- 
aifected by the law of diminishing returns, for which we 
were seeking in this chapter. 

110. The fluctuations of value may carry the price 
of a hat, for example, above or below that sum which is 
proportional to its cost of production. If the price in the 
market were less than the normal value, men would not 
long be content with receiving a smaller remuneration for 
their labor and capital than they could get elsewhere, and 
they would seek some other industry. The most skillful 
would probably remain in the business, but others would 
gradually withdraw from it. This would result in a re- 
duction of the supply of hats ; and, as the supply fell off, 
the existing demand would finally raise the price to a point 
where it would equal the normal value. 

If the price of hats were greater than the normal 
value at any time, each producer would try to increase 
his product in order to reap the advantage of the high 
remuneration ; and, if it were believed that the demand 
would continue to keep up the price, others, hearing of it, 
would enter this industry, and increase the supply. These 
causes would increase the supply until the price fell to 
the normal value. According to the law of demand and 
supply, a fall of price increases the demand for the 
goods and lessens the supply, and a rise of price 
diminishes the demand and increases the supply. 
The manufacturer watches the market closely : if he sees 
that the supply is large, he will limit his production ; that 



ii8 



EXCHANGE. 



the supply is short, he will increase his production. In this 
way the self-interest of the manufacturers is enlisted to 
keep the supply in the market sufficient to satisfy 
the demand for the goods at a price which will 
just equal the normal value. The market value, 
therefore, may fluctuate above or below the normal value, 
but will always tend to recur to it. Although waves are 
rising above and falling below the surface, yet the water 
of the ocean is always seeking its level. 

III. It may be well to remember, however, that the 
normal value does not always remain the same. If mate- 
rials, for example, increase in value, that would cause an 
increase in the outlay of capital. When, on the other 
hand, the laborers become more efficient, or improved 
machinery is introduced, or a better division of labor is 
rendered possible by the system of large production, then 
more can be produced for the same outlay, and so the 
value of each article can be reduced in value and price. 
To illustrate, suppose that i,ooo tables are produced in 
three months, at an expense, all told, of $30,000, or $30 
each. But, if new machinery were introduced which ena- 
bled 1,500 tables to be made in the same time, by the 
same number of men, then, even allowing a greater charge 
for the use of better machinery,* each table could be sold 
for about $23. 33^. In other words, the cost of produc- 

* This supposition may be roughly stated as follows : 

(i.) Buildings, etc $600 (2.) Buildings $600 

Materials used up 9,280 Materials 13,820 

Machinery (use and wear) . . 300 Machinery (use and wear). 700 

Taxes 250 Taxes 250 

Insurance 1,000 

Wages 17,000 

Manager's wages 1,200 



Insurance 1,000 

Wages (100 men) 17,000 

Manager's wages J>200 

$29,630 
Int. 3 months, 5 per cent. 370 



Int. do., about. 



$34,570 
430 



1,000 tables, at $30 = $30,000 1,500 tables at $23. 33^ = $35,ooo 



COST OF PRODUCTION. ng 

tion or the sacrifice involved in making a single table has 
been diminished by the introduction of more efficient ma- 
chinery, and this result becomes apparent in the lowered 
normal value of the article made. 

The great improvements in machinery and the marvel- 
ous progress of invention and skill have, in the last one hun- 
dred years, reduced the prices of manufactured goods to a 
very remarkable extent. This has been done in just the 
way we have explained, although wages of hired workmen 
have also risen. It is precisely with manufactured goods 
that division of labor, large production, and improved pro- 
cesses have had the greatest influence in cheapening their 
attainment (see Chapter VI). We give herewith Chart 
IV, which shows the movement of prices* since 1850. 
Starting in 1850 from the same line marked 100, the rise 
or fall of the lines indicates how the prices have fluctuated. 
It will be seen that the fine dotted line representing the 
prices of manufactured goods rose from exceptional causes 
during our civil war, but fell afterward from about 128 
in 1873 to 100 in 1885. If it had not been for the great 
production of gold, these prices would have shown a still 
greater fall. We shall refer to the chart again when we 
come to discuss agricultural products. But it will be well 
to remember that the general tendency of manufactured 
goods is to fall in price, as people grow in skill, intelli- 
gence, and experience, and as invention furnishes new ma- 
chinery. We shall soon find that the value of this class 
of goods stands in marked contrast to those articles af- 
fected by the law of diminishing returns, whose value tends 
to rise as more is wanted by an increasing population. 

112. Exercises. — i. Is there any limit to the produc- 
tion of cotton cloth } To which class would you assign 
it ? To which class would you assign the raw cotton out 
of which it is made } 

* The chart is based on prices at Hamburg, published by Dr. A. 
Soetbeer in 1886 (" Materialien," etc.). 



I20 



EXCHANGE. 



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COST OF PRODUCTION. 121 

2. If you were poor, and had saved enough money to 
buy a pair of shoes just as winter was coming on, why 
would you not be willing to let another person use them 
for a month ? Could any one complain if you refused ? 

3. If you depended on hunting for your existence, 
would the deer shot by your rifle be wages for labor or 
payment for the capital in the form of your rifle ? What 
kinds of sacrifice were necessary before the deer was shot ? 

4. When large and efficient steamships drove sailing- 
vessels to a great extent out of the carrying-trade on the 
ocean, what necessarily happened to the value of sailing- 
vessels ? Why were some to be seen rotting in our har- 
bors ? What effect would be produced by a falling off of 
the demand ? 

5. Why is it that, when the demand for shoes is good, 
the factories are all busily occupied? What effect has 
demand on the supply? How can the supply keep the 
price down to the normal expenses of production ? 

6. If all the workmen in the cotton-mills strike and get 
higher wages, and those in the woolen-mills do not, will 
that affect the value of cotton goods in respect to woolen 
goods ? Will it raise the cost of production in the cotton 
industry ? Will cotton goods exchange for more woolen 
goods than before ? Will more capital be advanced in the 
form of wages ? 

7. Show how it may be possible, by the introduction 
of new machinery, to pay more wages to workmen (as in 
the second case in the note, section iii), and yet sell the 
1,500 tables for, say, twenty-seven dollars each. 

8. If improved machinery lowers the price of manu- 
factured goods, does that mean that gold is scarce ? If 
the price is the amount of gold for which the goods ex- 
change, then, when the price falls, does that imply that 
the rise in the value of gold is due to its scarcity ? Has 
gold moved away from the goods, or have the goods moved 
away from the gold ? 



CHAPTER XII. 

THE VALUE OF COMMODITIES AFFECTED BY THE LAW OF 
DIMINISHING RETURNS. 

113. We may now go on to study the law which gov- 
erns the value of commodities affected by the law of di- 
minishing returns, of which agricultural products furnish 
the best example. (Class II in section loi.) 

It will appear at once that, unless the price of an arti- 
cle is equivalent to the normal value, just as in the case of 
manufactures, it will not be regularly produced. This is 
true. But there are different costs of production in 
growing such things as grain, and we must decide which 
one is to be taken as the regulator of value. A bushel of 
wheat when raised on poor land at great cost sells in the 
market for no more than another bushel grown on rich 
land at comparatively little cost. The sacrifice necessary 
to get a bushel of wheat from the soil is thus not the same, 
and yet the two products have the same value in the 
market. Why is this ? If the cost of production is higher 
in one case than in the other, why is it that both ex- 
change for the same amount of money ? 

114. Recall, for a moment, what is meant by the law 

of diminishing returns (see section 19). After a certain 

point in the cultivation of land has been reached, 

any additional supply can be obtained only at an 

increasing cost. This means that the same labor and 

capital will obtain a less quantity of products than before. 
(122) 



THE VALUE OF COMMODITIES. 



123 



c 

D 



But land is of very different grades of fertility. The high- 
est grade, moreover, may not be of sufficient extent to 
furnish all the agricultural products 
needed by the world for food and 
for materials of manufacture. Hence, 
if population becomes more dense, 
and more is wanted from the land 
than the highest grade can produce, 
the increasing demand for these arti- 
cles will raise the value and price, 
so that it will pay to cultivate poor- 
er soils (or to spend more money on soils already in 
use). 

By way of illustration, we may suppose that for the 
same labor and capital one kind of land, C T, yields 30 
bushels, and another kind, D U, yields 20 bushels of wheat, 
which sells at one dollar a bushel. When only C T was 
cultivated, 30 bushels sold for $30, and this sum paid the 
wages of labor and the interest of capital ; but it is clear 
that at one dollar a bushel D U can return only $20, and 
that this will not equal the $30 required to pay wages and 
interest. Therefore, so long as wheat is only one dollar 
a bushel, D U will not be cultivated. If, however, people 
demand more wheat than can be produced on C T (as at 
present cultivated), the price must go up under the demand 
high enough to enable the $20 bushels of D U to sell for 
$30 — the sum necessary to pay the current wages and 
interest for a certain amount of labor and capital. In this 
case, the value must rise to $1.50 ; or, in order to get an 
additional 20 bushels, the community must by its demand 
have raised the price of all the wheat to a point where it 
would be profitable to work the poorer lands. It is evi- 
dent that the wheat grown on the more fertile land, 
C T, at a cheaper rate, is sold at the same price as that 
grown on D U, which is produced at a higher rate. We 
can see, then, that, when agricultural produce is cultivated 



124 



EXCHANGE. 



on lands of different grades of fertility at the same time 
(provided people need all that comes from the poorer as 
well as from the better grades), the value of all de- 
pends on the cost of production of that part which 
is grown at the greatest expense. Where competi- 
tion is free, this is the law of normal value of agricult- 
ural produce, or of any commodities affected by the law 
of diminishing returns. 

115. Though the normal or general level of value is 
determined by the cost of production on the worst land 
in cultivation which yields a profit, yet it is to be remem- 
bered that fluctuations above and below this general 
level occur, owing to the changing movements of 
demand and supply. A lake in the mountains may be 
many thousand feet above the sea-level, but its surface 
may constantly be elevated and depressed by the move- 
ments of waves. Whether the general level is high or low, 
oscillations about this level can take place. Whether the 
normal level of value is high or low, fluctuations above and 
below this level constantly take place under the influence 
of demand and supply. 

The market value thus varies about the normal value. 
But, after one harvest is gathered, no new supply can be 
brought forward until the next season. In this interval of 
time the supply is fixed in amount, and, when the demand 
increases or falls off, the supply can not adjust itself ac- 
cordingly. When the harvests in Europe are deficient, 
and a demand arises for our cereals for exportation, the 
price rises ; but the higher price can not at once increase 
the supply (as it could in the case of manufactures), for 
one must wait for the proper season of the year, and time 
is necessary for planting and to permit the seed to grow 
and produce ripe grain. Thus, between harvests, agri- 
cultural commodities are entirely under the influ- 
ence of demand and supply ; because, if the value is 
greater or less than the normal value (regulated by the 



THE VALUE OF COMMODITIES. 125 

cost of production on the poorest land cultivated), it is 
neither possible to increase the supply and bring the value 
down, nor to stop production, so as to limit the supply 
and raise the value to the point where it meets the normal 
value. 

If the price, however, keeps up until the next season, 
it is quite likely that more land will be sown, and more of 
the grain produced than before, in order to reap the ad- 
vantages of the high price. In this way, sooner or later, 
the value which has been temporarily raised by demand 
will be brought down to the level of normal value. If, on 
th% other hand, the price was below the normal level of 
value, the opposite of what has just been described will 
take place — less land will be planted, and the supply will 
be shortened until the price rises sufficiently in course of 
time to equal the normal value. 

116. Other articles which come from the earth, such 
as coal and minerals, are affected by the law of diminish- 
ing returns ; for the deeper the shaft, the longer the gal- 
leries, the greater the outlay in keeping the mine ventilated 
and free from water, and the greater the expense in bring- 
ing coal or ores to the surface. The normal values of 
these articles are regulated by the cost of production at 
those mines which are worked at the greatest cost, provid- 
ed the whole amount thus produced is necessary to meet 
the demand at that price. 

The same is true of gold and silver when they are 
produced by regular mining processes. There is one pecu- 
liarity of gold and silver, however, which has a great influ- 
ence on their value. Many articles, such as wheat, exist 
but a short time, and are then wholly consumed ; gold 
and silver, on the contrary, are durable. You can 
melt gold in a crucible, and then make it into a coin ; then 
you can melt the coin and change its form to jewelry, and 
nothing is lost. Moreover, in collections you often see 
coins bearing the head of Alexander the Great or of the 



126 EXCHANGE. 

Emperor Augustus. Unless gold and silver are lost by- 
wear, or by shipwreck, or in some such way, all that has 
ever been produced is still in existence. Think what an 
effect this must have on its value. What would be the 
effect on the value of wheat if all that had ever been pro- 
duced were still in existence ? Owing to their durability, 
the supply of gold and silver is the result of accumulations 
from the annual supply as far back as they have been pro- 
duced, less the usual losses. The total supply of gold or 
silver in the world is, therefore, very great. The produc- 
tion since the discovery of America is shown in Chart 
II. Not all of this total production, of course, remains in 
existence ; but, as the production of gold in the world in 
1893 was about $157,228,100, and of silver about $126,- 
185,300, it can be readily seen how small a proportion the 
annual supply bears to the total supply. 

117. We can now better understand what it is that 
governs the value of gold and silver. We can not explain 
the value of gold and silver as we can that of spades or 
cotton cloth. If the price of a spade is at any time greater 
or less than the normal value, the supply is accordingly 
increased or diminished at once, and the whole existing 
supply is of such quantity that a moderate addition to it 
will speedily change its value. It is not so with gold and 
silver. If their value is at any time very high, and if the** 
annual production is thereby greatly stimulated, the new 
supply will even then bear so small a ratio to the total sup- 
ply that it can not materially affect the value in a short 
interval of time ; just as, when you pour a pail of water 
into a pond, the level of the whole pond will not be per- 
ceptibly raised. When the cost of production is less than 
is compensated for by the existing value of gold and silver, 
the existing value can not be at once brought down by 
increasing the supply. Consequently, for a considerable 
time, the value may, owing to some increased demand (or 
to some withdrawal of the supply), remain above the sum 



THE VALUE OF COMMODITIES. 



127 



which compensates for the normal cost of production. 
This is because the existing supply is so very great 
that yearly additions are small in comparison with 
it. It would not be so with spades, whose quantity could 
be quickly increased if their value were greater than the 
normal value. Spades wear out, and all that are made do 
not forever remain in existence ; but the total supply of 
gold and silver is large, because of the durability of the 
metals. 

If the yearly supplies of the precious metals were for a 
long time increased, they would finally have a perceptible 
effect on the total supply. By continually pouring pail- 
fuls of water into a pond for a long time, you could mate- 
rially raise the level of the whole pond. In the case of 
such durable articles as gold and silver, then, the 
value may remain for long periods above or below 
the sum which meets the cost of production— that 
is, the value may be above or below the payments for the 
cost of production at the poorest mine worked ; and so 
during these periods the value can not be said to 
conform to the cost of production (as in the case of 
spades), but is regulated by fluctuations of demand 
and supply. 

Yet, in the long run, it will be found that the 
value will be brought to conform to the cost of 
production. For, after a long enough time, an addi- 
tional production will affect even a large existing supply, 
or a slackened production will eventually, although very 
slowly, allow the existing supply to wear away, and thus 
diminish the total supply. We must, then, conclude that, 
for any short period of time, the value of gold and silver is 
dependent on the play of demand upon the large existing 
supply, without assigning much influence to the annual 
supply. The fear of a falling off of the annual supply of 
gold has, therefore, less importance than is usually ascribed 
to it. 



128 EXCHANGE. 

Il8. The normal values of agricultural and mining 
commodities, in general, as we have seen, exchange in 
proportion to their costs of production on the poorest soil 
or mine whose use is required to satisfy the demand. The 
minor changes about this line are caused by the fluctua- 
tions of demand and supply. Thus, in the diagram, when 




only the best land, A, is in cultivation, the normal expenses 
(represented by the straight line) will be low, and the 
fluctuations in price (represented by the dotted line) will 
rise and fall about a low level. Then, when an increased 
demand for food comes, and poorer soils like B are taken 
into cultivation, the normal expenses of production on the 
poorest soils cultivated will be higher than before, and the 
fluctuations will now be about a higher general level. And 
so on, in the same way, with C. When an increasing de- 
mand for food forces poorer lands into cultivation, the 
general tendency will be toward higher prices for 
agricultural products. In the United States we have 
not as yet cultivated more than the best lands, and have 
not practically felt the law of diminishing returns; but 
in England and in Continental countries it is otherwise. 
By referring to Chart IV (page 120), we can see how the 
prices of agricultural commodities since 1850 have tended 
upward, in marked contrast to the prices of manufactured 
articles whose prices have shown a downward movement. 

119. Although this force is always in existence, tending 
to raise the value of agricultural products, there are coun- 
ter-forces of greater or less strength operating 
against this tendency, and the normal value, at any 
given period, is the resultant of these opposing forces. It 
can be illustrated by a diagram like that which represented 




THE VALUE OF COMMODITIES. 129 

the actual growth of population (section 29). A block of 
wood on the floor, when acted on by two forces, A and B, 
pushing in opposite di- 
rections, will move in 
the direction in which 
the stronger force is 
acting. So of the val- 
ue of agricultural products. If the strength of the tend- 
ency to higher prices, owing to the law of diminishing 
returns, is greater than the progress of improvements 
which tend to cheapen all processes of cultivation, then 
prices will continue to rise, although counteracting im- 
provements are constantly at work. 

These improvements, which serve to retard the law of 
diminishing returns, are of various kinds. New methods 
of cultivation, such as rotation of crops, better drainage of 
land, a more scientific knowledge of the use of manures, 
greater skill in feeding and breeding cattle, and deeper 
plowing, are examples. Then machinery is now applied 
to plowing, harrowing, sowing, and reaping grain in mar- 
velous ways by the use of steam and various ingenious in- 
ventions. The growth of our railways and the cheapened 
cost of transportation have had a marked effect ; for the 
railways bring hitherto unused lands of great richness 
within reach of the markets, and thus place the produce 
of fertile prairie soil in the markets of the world at a lower 
price than that from poorer lands nearer those markets, in 
spite of the charge for freight (see section 22). Therefore, 
if it were not for wonderful invftitions, the prices of grain 
would be much higher than they are now. In Chart IV 
we see that the demand of an increasing population for 
food has been a stronger force than even improvements 
and the opening up of new lands, because agricultural 
products are higher in price now than they were in 1850, 
in spite of the great industrial progress during this period. 

120. Exercises. — i. Explain how the market price ol 



I30 



EXCHANGE. 



a commodity is constantly drawn toward that sum which 
is just enough to meet the sacrifices of production. Take 
a hammer and a bushel of oats, and suppose the price of 
each to be above or below the normal value, and then con- 
sider what would take place. 

2. Are manufactured commodities regulated by the 
same laws as those which regulate agricultural commodities ? 

3. Why is an increased supply of food demanded? Is 
more food wanted as countries become more densely 
populated ? If more people require more food, why can 
they not get it without raising the price of food ? (See 
section 114.) 

4. When we have an abundant harvest of wheat in the 
United States and a slight foreign demand, how is the 
value of wheat affected ? 

5. Can you think of any improvements which operate 
against the tendency of coal and minerals to increase in 
value as the mines become deeper ? How about the means 
of raising them to the surface ? 

6. Houses are more durable than some other things. 
If they become very profitable, is the supply of houses in- 
creased ? If they become very unprofitable, is the supply 
diminished accordingly ? 

7. We consume nearly the whole quantity of wheat 
produced each year, and comparatively little is left over. 
Why is it that merchants eagerly watch the reports as to 
the probable yield in order to know what the price will 
be } Why should they not do the same for gold or silver ? 

8. If a man having $40 a month spends $20 for food 
and $20 for clothes, shelter, etc., will he be any worse off 
if the price of his food goes up to $25, and the price of 
clothing, etc. (owing to improvements), goes down to $15 ? 

9. If good wagon-roads were made through a country, 
would that affect the value of agricultural produce in any 
way ? If the steel used in a plow were cheapened, would 
that have any effect ? 



CHAPTER XIIL 

VALUE OF COMMODITIES WHERE COMPETITION IS NOT 

FREE. 

121. We have hitherto been discussing value under 
the supposition that competition was free. We have sup- 
posed that, whenever the price rose above the sum which 
would be proportional to the cost of production, the supply- 
could be increased, because nothing interfered with the 
producer in his attempts to produce more in order to gain 
the exceptional rewards ; so that, where competition 
was free, it was not possible that the price of a com- 
modity could long exceed the normal value. By free com- 
petition we mean the ability to transfer labor and capital 
freely to a new channel, without the interposition of any 
natural or artificial barriers ; so that the supply can be 
more or less increased by any producer. But we know 
very well that free competition does not always exist ; and 
that commodities are often produced under conditions 
which do not admit of the free movement of labor and 
capital. It will be necessary now to consider how the 
values of articles produced under such conditions are reg- 
ulated. 

122. There are many things which are controlled by a 
natural monopoly ; and, since their supply can never be 
increased, it is evident that the price may remain perma- 
nently above or below a sum which is proportional to their 

actual cost. The pictures painted by Raphael or Murillo, 

(131) 



132 



EXCHANGE. 



for example, can not now be increased in supply. What 
is the principle which governs their value ? A merchant 
with an elevator full of wheat may have a desire for a 
Murillo. What law determines the ratio of exchange be- 
tween these things ? It can not be the cost of production, 
for the picture rises in value irrespective of the original 
cost, simply because men show a strong desire to get pos- 
session of one. We can not increase the supply when the 
value rises, and thus bring down the price to a sum pro- 
portional to the actual cost. In short, where the sup- 
ply is thus absolutely limited, the value changes 
according to the demand. If the merchant is exceed- 
ingly anxious to buy the picture, and the owner is not 
eager to sell it, the former will offer more wheat for it than 
if Murillos were abundant. The strength of the desire 
aroused by that picture, and which that picture only can 
satisfy, will determine how high the price can be forced 
up. In such cases, the cost of production has nothing to 
do with the value, which depends solely upon demand 
and supply. De Quincey * illustrates happily this prin- 
ciple of monopoly value : " You are on Lake Superior in 
a steamboat, making your way to an unsettled region 
800 miles ahead of civilization, and consciously with no 
chance at all of purchasing any luxury whatever, little 
luxury or big luxury, for the space of ten years to come. 
One fellow-passenger, whom you will part with before 
sunset, has a powerful musical snuff-box ; knowing by ex- 
perience the power of such a toy over your own feelings, 
the magic with which at times it lulls your agitations of 
mind, you are vehemently desirous to purchase it. In the 
hour of leaving London you had forgot to do so ; here is 
a final chance. But the owner, aware of your situation 
not less than yourself, is determined to operate by a strain 
pushed to the very uttermost . . . upon the intrinsic worth 

* " Logic of Political Economy," p. 258, Works, xiii, Ed. 1863. 



ABSENCE OF COMPETITION, 



133 



of the article in your individual estimate for your indi- 
vidual purposes. He will not hear of [the cost of produc- 
ing a music-box] as any controlling power or mitigating 
agency in the case ; and finally, although at six guineas 
apiece in London or Paris you might have loaded a wagon 
with such boxes, you pay sixty rather than lose it, when 
the last knell of the clock has sounded, which summons 
you to buy now or to forfeit forever." 

If the supply is fixed, the value varies directly with 
the demand. By demand, we mean effective demand ; 
that is, a desire coupled with purchasing power. A beg- 
gar, without purchasing power, may have a desire for a 
horse, but his " demand " will not affect the price of 
horses. 

123. With these exceptional cases of value, in which 
the supply can not be increased at pleasure, are to be asso- 
ciated instances where the limitation of supply is not a 
natural but an artificial monopoly. The owner of a 
patent can control the supply of an article at his will, 
although many others might be equally capable of pro- 
ducing it ; but the patented goods can be sold at a price 
above the normal value, because there is no possibility of 
other producers increasing the supply, and thus bringing the 
price down to the normal value. The value of this article 
will depend wholly on demand and supply : an increase 
of the supply to a certain point will result in a fall of 
price ; but a fall in price may lead to an increased de- 
mand. The quantity produced will vary with the strength 
of the demand for the article at a given price ; so that 
the maker will try to sell only that quantity which will 
yield the largest total return.* In most cases, as the price 
rises, the demand falls off ; as the price falls, the demand 

* Marshall says : " If he calculates that, at the price _j/, an amount 
X can be sold, and that for this amount the expense of production 
would be z per unit of the commodity, he will try to fix the price so 
as to make xy—xz a maximum." (*' Economics of Industry," p. 181.) 



134 



EXCHANGE. 



increases. In this way the play of demand and supply 
governs the value of commodities artificially lim- 
ited in quantity. 

Other instances are to be found in the temporary 
effects of combinations. The coal companies in certain 
districts combine to restrict the total number of tons of 
coal to be produced each year, and assign to each com- 
pany a quota. In this way, the price may be kept above 
the normal value of coal ; because, with a given demand 
by the public, the supply is limited in order to cause the 
whole to be taken off at a price independent of the normal 
value. The same forces are at work in the temporary 
manipulations of grain, or other produce (called " cor- 
ners "), by which a large supply is for a time withdrawn 
from the market. 

124. There are, however, other conditions in which 
there is no free movement of labor and capital which are 
far-reaching and very important in their effects. It is 
often assumed that, while labor and capital may not move 
freely from one country to another, yet that this movement 
is perfectly free within the limits of a country. If free 
competition of labor exists in the United States, then, 
when higher wages are paid, for instance, in Iowa than in 
Vermont, it would follow that laborers would move from 
Vermont to Iowa until wages for similar work are equal- 
ized. Now this we know to be untrue. Although labor- 
ers do move more or less in order to improve their posi- 
tion, they do not, for various reasons, move with that 
freedom which lowers wages where they are high and 
raises wages where they are low, by increasing the supply 
of workmen in the one case and diminishing the supply in 
the other. A cook will get $16 a month in Boston, but 
$40 in Montana. The well-known difference in wages for 
the same work in different parts of the United States is 
conclusive proof that there is not perfectly free com- 
petition of labor. To leave a well-known region for one 



ABSENCE OF COMPETITION. 



135 



unknown; to abandon friends and familiar associations ; 
to have the enterprise to look out beyond one's surround- 
ings ; to choose to live among people of different habits of 
thought, and who observe religious customs in wholly new 
ways ; to expose political opinions to criticism ; to learn 
new social customs ; to possess intelligence enough to find 
out the advantages of distant employments ; to save the 
necessary capital which will pay for transportation ; to be 
superior to ignorance, sluggishness, and inertia — all these 
obstacles are constantly preventing laborers from better- 
ing their condition in life by a change of home. Of course, 
workmen are daily gaining enterprise in this direction, 
and are becoming more and more cosmopolitan; but the 
movement is only partially effective in equalizing wages. 

Moreover, there is no real competition between 
different classes of laborers. If it is found that there 
is a great demand for skilled chemists and engineers in 
manufacturing establishments, will this demand be met by 
men engaged in unskilled occupations rushing in to in- 
crease the supply ? Certainly not. To pass from an un- 
skilled to a skilled employment requires time, patience, 
industry, and training ; and this serves as a barrier to pro- 
tect the higher occupations. If an employment requires 
merely a good knowledge of arithmetic and ascertained 
honesty, that serves to keep out of the competition vast 
numbers of people ; so that there are various strata of 
workers in our industrial system who practically do not 
compete with each other. People do move from one to 
another, but still the different groups are quite distinctly 
defined. The laborers in the different groups do not, in 
fact, compete. A cotton-operative may compete with a 
woolen-operative, but not with a book-keeper, a cashier, a 
jeweler, or a surveyor. 

125. So, likewise, there is not perfectly free com- 
petition of capital. The alertness, sagacity, and watch- 
fulness of capitalists are proverbial, and capital moves much 



136 



EXCHANGE, 



more freely than labor from places where the returns are 
low to places where they are high ; but still we all know 
that the rate of interest paid for the use of capital is much 
greater in the Mississippi Valley than on the Atlantic 
coast, and much greater west of the Mississippi than east 
of it. Thus there is not perfectly free competition of capi- 
tal with capital within the limits of the United States. If 
there were, the rates of interest would not vary so greatly 
as between five per cent in New England and perhaps fif- 
teen per cent in Montana (for similar securities). 

126. Wherever, therefore, there is no free competition 
of labor and capital between different groups of industries 
in the same countries, between different parts of the same 
country, or between two different countries, we shall find 
that for the same exertion and sacrifice the rates 
of wages and interest may be regularly higher 
in one than in the other.* Let us understand, by 
way of illustration, that there is no free competition of la- 
bor and capital in the industries which produce corn and 
iron in the State of Ohio. What is the principle which 
governs the exchange value of corn and iron .? If the 
iron-manufacturer exacted a price higher than would 
repay, in the opinion of the farmer, proportional re- 
wards for the sacrifices of producing iron, what recourse 
has the farmer.? He must have the iron, and he must buy 
it by means of his corn. If the price of iron goes up, 
does he take some of his capital and labor and set to work 
making iron ? No ; because, by the supposition, there is 

* The rewards for the sacrifice to laborer and capitalist will conse- 
quently be regularly higher for one and the same thing in one country 
than in another, provided that the same amount of labor and capital 
is required to produce the given commodity in both places. Even 
if wages and interest, however, are higher in one place than in an- 
other, then peculiar advantages in skill and natural resources might 
enable so much more to be produced that the value of each (unit of 
the) commodity might be low, in spite of the high wages and interest. 



ABSENCE OF COMPETITION, 



137 



no free movement of labor and capital between the corn 
and iron industries.* The farmer probably does not know 
the processes of making iron, and might not succeed in 
making iron if he did ; and his farm-hands without train- 
ing would not know how to manage a blast-furnace or be 
molders. In short, he must make the best terms he can 
with the iron-manufacturers, and each will confine him- 
self to his own industry. 

127. In such circumstances, what will settle the terms 
of exchange between iron and corn ? The reciprocal 
demand. Suppose the farmer to be in want of iron for 
a plowshare, but able to postpone his purchase. Not 
being over-anxious to buy iron, if for any reason the manu- 
facturer raises prices, the farmer may lessen the strength 
of his demand. But, at the same time that the farmer's 
demand for iron may be weaker, the manufacturer's de- 
mand for corn may become more urgent. In this case, 
the reciprocal demand for corn and iron is such as to give 
the advantage to the farmer. Therefore, iron will fall 
relatively to corn, and corn will rise relatively to iron. 
The strength of the demand for iron on one side, 
compared with the strength of the demand for 
corn on the other, will determine the exchange 
values of the two commodities. If the demand for 
iron increases at the same time that the demand for corn 
falls off, the value of corn will fall relatively to iron, and 
that of iron will rti5e relatively to corn. In this way the 
play of reciprocal demand will govern the values of com- 
modities not produced in the same competing group of 
industries, or in non-competing districts of the same coun- 
try, or in different countries. 

128. This principle of reciprocal demand, as al- 

* If he should go into the manufacture of iron, and if there were 
free competition, then the price of iron could be kept down by that 
means and the wages and interest in both industries would be propor- 
tional to the sacrifices. 
II 



138 



EXCHANGE. 



ready said, determines the exchange values of commodi- 
ties which are produced in different countries, between 
which there is no free competition of labor and capital. 
If England wants corn from the United States, and we 
want iron from England, then the case is just the same as 
that given above of the farmer and manufacturer in Ohio. 
The iron from England will cost us just what the corn 
which we give for the iron costs us. If European harvests 
are good, and we are building railways rapidly, then the 
foreign demand for our corn will be weak, and our de- 
mand for English iron and steel will be strong. The con- 
sequence will be an increased value of iron and a dimin- 
ished value of corn in the United States. To get the same 
amount of iron as before, we are obliged to give more corn 
in exchange. The country which has the stronger demand 
for the commodities of another country, as compared with 
the demand of the latter for the commodities of the former 
country, will exchange its productions in general at the 
lower value. The value of an imported commodity 
depends on the cost of acquisition — that is, on the 
value of the things exported in exchange for it. 
If we export one hundred gallons of petroleum in payment 
for an imported French clock, the clock should exchange 
approximately for what the one hundred gallons of petro- 
leum will exchange for in the United States. 

129. Because goods are sold for money, people some- 
times think wrongly that for all goods which are sent 
abroad money is imported. This is, of course, a great 
mistake. The imports are set off against the ex- 
ports, and only the balances are paid in money. 
In this way exports are bartered against imports, and the 
only means a country has of paying for her imports is by 
her exports. Such a statement must, however, include 
all that a country exports ; it must include not merely 
what is generally understood as merchandise, but also such 
things as bonds, securities, etc., and even gold and silver, 



ABSENCE OF COMPETITION. 



139 



when sent as merchandise. In the United States we pro- 
duce large amounts of gold and silver, and the shipment of 
gold and silver is often of exactly the same nature as the 
shipment of grain. When we import $10,000,000 of goods, 
and export $5,000,000 of merchandise, $2,000,000 of rail- 
way bonds, and $3,000,000 of silver bullion, the exports 
and imports balance, and pay for each other just as truly 
as if we had exported $10,000,000 in merchandise alone. 

130. The values of imported and exported commodi- 
ties, moreover, will tend to adjust themselves so that the 
exports will balance the imports. This follows from 
our law of reciprocal demand. If, owing to bad harvests, 
there is an increased demand in Europe for our grain, our 
exports will increase ; and, if we buy no more from Eu- 
rope, then our exports may exceed our imports. This 
situation contains in itself the forces which will bring 
about a movement toward an equilibrium between exports 
and imports. Any continued excess of exports will neces- 
sitate the shipment of money to this country ; for, if this 
excess can not be paid for by imported goods, then resort 
must be had to money. When money is sent to us 
in international trade, it tends (other things being equal) 
to raise prices (section 143), and, as the prices of products 
at home rise, that will cause a falling off in their exporta- 
tion ; for we often see our exports of wheat or cotton 
stopped for a time by a rise of price in our markets. In 
this way the excess of exports will be gradually diminished. 
On the other hand, however, the withdrawal of money 
from abroad, to be sent to the United States, will affect 
prices abroad in a contrary way, and create a tendency to 
a fall of prices. If so, this will stimulate us to buy more 
from Europe than when prices were higher. Moreover, 
the fullness of our bank reserves with foreign gold will 
allow an expansion of loans, and so give people more pur- 
chasing power (see Chapter XXIX). This will make it more 
likely that the United States will buy more from abroad. 



HO 



EXCHANGE. 



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ABSENCE OF COMPETITION. 



141 



So that, whether our exports exceed our imports, or our 
imports exceed our exports, there are in constant opera- 
tion forces which tend to cause the values of exports and 
imports so to adjust themselves that they shall balance 
each other. 

This is illustrated by Chart V, which shows the exports 
and imports solely of merchandise into and from the 
United States. This does not include the shipments of 
gold and securities, but it shows how general the tendency 
is for exports of merchandise to keep near to the imports. 
From 1850 to i860 the great addition of gold to our ex- 
ports made them about equal to our imports. When, 
for a considerable period, from 1862 to 1873, our imports 
of goods greatly exceeded our exports, it was but natural 
that the excessive purchases abroad in such a speculative 
period should eventually be liquidated by a corresponding 
excess of exports over imports, from 1873 to 1883. It is 
to be remembered, however, that we have no statistics of 
the shipment of securities, bonds, etc., and that an appar- 
ent excess of imports or exports of merchandise may be 
entirely counterbalanced by the sending of these se- 
curities. 

131. Exercises. — i. Was there free competition be- 
tween the North and South in the days of slavery ? Did 
labor and capital move freely from the North to the 
South ? 

2. Even when Raphael was alive, did the value of his 
pictures depend upon cost of production ? Did he pos- 
sess any natural monopoly when alive ? 

3. Why is it that the possession of a successful patent 
insures a great fortune 1 By what means is a vast surplus 
from the business left for the owners of the patent "i (Sec- 
tion 123.) 

4. Great numbers of people come from Scandinavia to 
the United States. But should you say that there was 
free competition of laborers between these countries ? 



142 



EXCHANGE. 



Wages are higher in the United States than in Scandi- 
navia. 

5. More or less English capital is every day invested 
in the United States, but the rate of interest on capital for 
the same security is higher here than in England. Is there 
free competition of capital between England and the 
United States 1 

6. Is there any essential difference between trade be- 
tween country and country and trade between county and 
county, or even between man and man .? Discuss this in 
connection with the absence of free competition. 

7. Even if the farmer and iron-maker (in section 126) 
lived in close proximity, would the values of their com- 
modities be determined in the same way as those of two 
persons between whom there was free competition "i 

8. If a farmer wants a suit of clothes, will he gain more 
by growing wheat than by making cloth } If he sells 25 
bushels of wheat for $25, and pays $25 for a suit of clothes 
in the United States, would he be better off if he could 
take only 15 bushels to England and buy as good a suit 
of clothes for $15 .^ (See sections 88 and 89.) 

9. What determines the exchange value between the 
beads which traders carry to Central Africa and the ivory 
which they buy with the beads } The traders pay a certain 
sum of money for the beads, and sell the ivory for a cer- 
tain sum of money. Does the intervention of money affect 
the exchange values of beads and ivory } 

10. A farmer sells his products for money, and with 
the money buys clothing, dry-goods, fish, etc. The value 
of his products is equal to the value of his purchases. Is 
the situation any different between two countries .? 

11. If the farmer buys more than he has products with 
which to pay, and so gets in debt, how else can he bal- 
ance his purchases in the end but by producing more ? Is 
this situation any different from that when one country has 
an excess of imports ? 



CHAPTER XIV. 

CREDIT. 

132. Under the general subject of exchange, we have 
been discussing the reasons why goods are exchanged, the 
principles of value (or the proportions in which they are 
exchanged), the aid given to exchanges of goods by the 
use of money, and now it will be our object to explain the 
operations of credit. 

We often hear men in conversation placing a very high 
estimate on honesty and integrity as sources of business 
success. This has a close connection with the exchange 
of goods. The forms of credit are created by the business 
world to transfer capital to those who will make the most 
effective use of it, and to facilitate the exchange of goods. 
Credit (from the Latin credo, " I believe ") means belief, 
or confidence. If A hands over some of his wealth to 
B, with the understanding that B will return it to him 
again, A gives credit to B ; or, in other words, declares 
a certain confidence in B. If B is honest, and as good 
as his word, he keeps his " credit " high by always justify- 
ing the confidence placed in him. In times of business 
depression, however, people find it hard to borrow, be- 
cause there is a general distrust, or lack of confidence in 
everybody ; for, in a financial crisis, firms which had had 
the confidence of all have suddenly been unable to fulfill 
their promises. 

133. In common practice people think of credit only 

(143) 



144 



EXCHANGE. 



in connection with borrowing money ; but this is not the 
whole truth. For people who borrow money on 
credit really borrow the use of the wealth which 
that money will buy. No one ever thinks of borrowing 
money merely for the sake of keeping it ; on the contrary, 
it is at once exchanged by the borrower for goods, or used 
to buy land, or to build a house. '' In some countries, 
where coins are not yet used, people lend and borrow corn, 
oil, wine, rice, or any common commodity which all like 
to possess. In the parts of Africa where palm-oil is pro- 
duced in great quantities, people give and take credit in 
oil." * Of course, in civilized countries where money is 
in general use, the borrowing and lending of wealth is 
masked under the forms of borrowing and lending money. 
The real thing dealt in, however, is the wealth itself; and 
when A lends money to B, A is really giving B the use for 
a time of a certain part of the wealth in the community. 

134. There are good reasons why credit should be 
used. Many widows, children, invalids, and others may 
have some wealth, but are unable or unwilling to under- 
take its management in active business enterprises. Others 
may have more wealth than they need. On the other hand, 
there are many keen, energetic men naturally fitted. for 
managing industrial operations, who understand men, get 
on well with employes, and have hard-earned experience, 
but who may have little capital of their own to start with, 
or who can profitably employ much more capital than they 
own. These two classes of people supplement each other ; 
and by credit wealth passes from the hands of those who 
can make little to those who can make the best use of it. 
In other words, credit allows the wealth of the coun- 
try to be more effectively employed in production. 
The banks of the country are the " markets " for credit — 
that is, they are the places where people leave their sur- 

* Jevons, "Primer of Political Economy," p. no. 



CREDIT. 145 

plus funds, and where borrowers go in order to get the 
use of wealth. What banks are, and how they are carried 
on, will be described in another chapter.* 

135. The forms of credit, however, aid in the exchange 
of goods, and serve as a substitute for money. In its sim- 
plest form, this can be seen in the operations of two shop- 
keepers — a grocer and a butcher. The grocer buys meat 
of the butcher, and the butcher buys supplies of the grocer. 
Now, it is wholly unnecessary that each should carry money 
every time that he buys of the other. If the grocer should 
keep a careful account of all he sells to the butcher on 
credit, and if the butcher should keep a similar account 
of all he sells to the grocer on credit, then, at the end of 
a month or a year, the sum of the two accounts can be 
compared, and it can be found out to which of the two 
a balance is due. This balance only need be paid in 
money, and may often be no greater in amount than some 
of the daily transactions. A single payment of a small 
sum of money is all that is required to settle a great num- 
ber of transactions, involving hundreds and thousands of 
dollars. So long as confidence exists between the two 
dealers, so that they give to each other the use of wealth, 
with no other security than the entries in an account- 
book the use of credit saves the use of actual money. 
This is often called book-credit. 

136. Another form of credit, however, serves to econo- 
mize the transfer of money in a more marked way than 
book-credits. When persons are buying and selling be- 
tween distant cities in the United States (as between New 
York and Chicago, or even between Boston and New 
York), or between the United States and Europe, a very 
clever device is adopted to save the use of money in mak- 
ing payments. Let us take, by way of illustration, a sim- 
ple trade between New York and London. A sends a 

* Part II, chap. xxix. 




146 EXCHANGE. 

cargo of wheat, worth $100,000 (or ;^2o,ooo), from New 
York to B in London ; and C, without knowing of B's 

transaction, sends a car- 

London New York r i -i i 

B I <( A go of Steel rails, worth 

$100,000, to D in New 
York. If money were 
used, two large sums of 
gold would cross the 
ocean, each running the risk of loss, and causing a good 
deal of expense. This is all obviated by the use of a bill 
of exchange. A has a claim on money due to him in 
London, and he is willing to sell this claim to any one 
(like D) in New York who is obliged to make payments to 
some one in London. A is an exporter ; D an importer. 
A makes out a title to this money due him from B in 
London, in the form of a bill of exchaDge,* sells it for 
$100,000 to D (who is inquiring for some one who has 
a claim on money in London), and thus A gets the pay 
for his wheat at once. D now has a title to the ;2{J"2o,ooo 
in B's hands, and so he pays C for the steel rails by 
sending C this claim on B (in London), properly in- 
dorsed f in C's favor. In this manner, D sends by mail 
to C (different copies in different steamers, '" first " in one, 

* The actual form is as follows : 

New Yotrvl^ January i, 1886. 

At sight of this first bill of exchange (second and third unpaid), pay 
to the order of D [the importer of steel rails] ;i^20,ooo, value received, 
and charge the same to the account of 

[Signed] A [exporter of wheat]. 

To B [buyer of wheat], 

London, 
f He does this by indorsing the bill of exchange he bought from A 
as follows : 

Pay to the order of C [the seller of steel rails], London, value in 
account. [Signed] D [importer of steel rails]. 

To B [buyer of wheat], 
London. 



CREDIT. 



147 



" second " in another, etc., to insure certain transmission) 
a demand on B, and C then calls on B for the ;z^2o,ooo. 
Thus all four men have settled their transactions by a bill 
of exchange without any risk arising from the use even of a 
single piece of coin. By credit, or confidence in one an- 
other, this exchange of goods without the use of money 
was rendered possible. Thus, in 1885, goods to the 
amount of $1,319,717,084 were exported and imported into 
the United States ; but gold and silver coin and bullion 
were imported and exported in the same time to the value 
of only $85,473,848. For the rest, no money was needed. 
137. We have already seen (sections 84, 85) that, when 
persons have goods to sell and others wish to buy such 
goods, a common place of meeting for both buyers and 
sellers in a '' market " is a necessity among civilized peo- 
ple. The same is true of buying and selling bills of ex- 
change. A in New York will not know that D wants a 
bill, and D will not know that A has one to sell ; for in a 
great commercial city one man is not informed of the ac- 
tions of many other persons. Consequently, banks have 
been selected as places where A can sell his bill, and 
where D can come to ask for one. In practice, there- 
fore, banks buy and sell bills of exchange, and get 
a profit by charging a small commission. Like other 
things, bills of exchange rise and fall in price with changes 
in the demand and supply. If many merchants are ex- 
porting cargoes to England, bills are abundant, and their 
price falls ; that is, when exports exceed imports, bills are 
low. On the other hand, if many merchants are import- 
ing from England, there will be a strong demand for " bills 
on London " (by which they can meet their purchases 
from England), and bills will rise in price. A bill, or title 
to a pound sterling in London, is worth at par just the 
amount of gold in the pound, which is equal to $4,866 -f- 
of our gold coins ; and the price may rise above or below 
this par value. Therefore, when exports balance imports, 



148 EXCHANGE, 

bills of exchange will be selling for about $4.86 ; when 
exports exceed imports, for less than $4.86 ; when imports 
exceed exports, for more* than $4.86. 

138. The act of giving credit creates other forms than 
bills of exchange by which the act is signalized. These 
forms of credit signify that property has changed hands. 
In the case of A, whose cargo of wheat was handed over 
to B in London, the confidence placed in B permitted the 
use of a bill, by which B was drawn upon with a cer- 
tainty that he would meet the demand. Likewise, to con- 
sider a new case, X, a merchant in Boston, might sell 
cotton goods to Z, a retail buyer in Ohio, on a credit of 
sixty days. Z does not pay the money, but gives a note, 
promising to pay in sixty days a given sum to X. This 
use of credit creates a form called a promissory note. 
X has confidence in Z, and is willing to give him the cot- 
ton goods merely on his written promise to pay. The 
merchant X often takes this note, if he is in need of ready 
money, and has it discounted at a bank ; and the bank 
will collect the sum from Z when the note falls due. 

If the promise to pay is made, not by an individual, 
but by a banking institution, or by a State, it is clear that 
people will take these promises in exchange for goods so 

* The price can not go up beyond about $4.90, the " shipping- 
point." To send $4.86 to London, about 3^ cents is charged for bro- 
kerage, insurance, and freight. Therefore, if D wants to get a pound 
sterling ($4. 86) to C, his creditor, in London, he will not pay more for 
a paper title to a pound sterling (i.e., a bill) than he would pay if he 
sent across $4.86 in gold, and paid the 3^ cents of charges. When 
the price rises to $4.90, gold will be shipped to London in preference 
to buying bills. 

When the price falls, it can not, for the same reasons, fall more 
than about 3^ cents below $4.86. When the price is as low as about 
$4.83, gold will be imported into the United States. That is, persons 
having bills to sell will not sell for less than 3^ cents below par ; for 
they can bring across the gold itself for that. So $4.83 is called the 
" importing-point." 



CREDIT. 



149 



long as they have confidence in the promise of the issuer. 
The note of a private person might be so used, but it 
could be passed only in a limited district, because the 
value of his promise might not be known outside of it. 
This objection would be less true of a bank, and still less 
true of a State. Just in proportion as people take these 
promises to pay instead of money is a certain amount of 
metallic money rendered unnecessary. It is the credit of 
the issuer which makes their circulation possible. If no 
confidence were reposed in the issues, no one would give 
away goods of value for what would be worthless prom- 
ises. Banks, therefore, rely on their credit with the 
community, and issue notes, or promises. Following 
their example, when they can not get sufficient means 
in ordinary ways, governments also issue their prom- 
ises to pay, or "coin their credit." In this manner they 
get the use of wealth by giving in return only a form of 
credit. 

139. We have now mentioned book-credit, bills of ex- 
change, and promissory notes as forms of credit. Another 
and fourth form is the check, which serves as a substitute 
for money in a very remarkable way. A check is an 
order on a bank to pay some one a given sum of 
money. The person who signs it keeps a deposit account 
at the bank, and by the check he transfers to another 
the right he 
had to draw on 
that deposit. A 
simple illustra- 
tion may serve 
to show how 
checks save the 
use of money. 
Suppose that a country merchant, A, has been buying 
wool, which he takes to New York and sells to B, a 
wool-broker, for $1,000. B pays A by a check on his 




I50 EXCHANGE. 

bank, X. B at once sells the wool to a manufacturer, 
C, and C pays B by a check on the same bank. Then C 
sells cloth to D, a wholesale dealer in dry-goods, to the 
amount of $i,ooo, and is also paid by a check on X. 
Finally, A, before going home, purchases dry-goods of D 
to the amount of $i,ooo, and pays D by giving him the check 
he received from B on the bank X. No money was re- 
quired in all these transactions. A was the owner of B's 
deposit, and he gave his right to D. Now D gave a check 
to C for $i,ooo, and thus transferred his right to a deposit 
of $i,ooo to C, and C gave a check for the same sum to 
B. So, at the end of the whole circle of transactions, B 
has the same sum (leaving profit aside) on deposit as at 
first ; no money has left the bank ; no money was used 
by any of the four ; and yet the four transactions amounted 
to $4,000. 

140. The use of checks depends on the habit of 
depositing funds in banks. This habit exists chiefly in 
England and the United States, and does not prevail gen- 
erally on the Continent of Europe. People must have con- 
fidence in banks, to leave their property there ; but it is a 
great advantage to have a place of deposit, where money 
is safe from fire and robbery. Without confidence, or 
credit, the check system could not exist. In our illustra- 
tion, A had confidence that B's check was good, and gave 
his wool for it ; but, if A had gone to the bank and drawn 
out the actual money, the advantage of the check would 
have ended there. When he went to the bank and pre- 
sented his check, however, he did not want the actual 
money, for he had confidence, or credit, in the bank, 
and only wanted the right to draw a similar check to pay 
for his purchases. The banker then took $1,000 from B's 
account and credited it to A. When B brought C's check, 
the bank took the $1,000 from C's account and credited 
it to B. D also found it useful to pay by means of a 
check, and he did not draw out the money. He paid C 



CREDIT. 



15^ 



by a check, and then C appeared on the books of the bank 
as the owner of the deposit instead of D. When A paid 
D by a check for ^1,000, the bank took the $1,000 away 
from A's account and credited it to D, and matters stood 
as at first. So long as people pay by checks, payments 
may be made by transfers of deposits on the books of a 
bank performed simply by written entries. The extent to 
which checks thus save the use of money is marvelous. 

141. It may not happen, however, that all the parties 
to a transaction have deposits at the same bank. Persons 
buying and selling may give checks drawn not on one 
bank but on 

several. So ^ — ^ ^- 

let us un- 
derstand that 
in this case 
Aj B, C, and 
D represent 
d i ff e r e n t 
banks in the 
same city. 

One group of persons, a^ b, c, deposit in bank A ; an- 
other group, d, e, f, in bank B ; another group, gy h^ /, 
in bank C ; and another group, k^ /, m^ in bank D. Now 
when a pays ^ by a check on bank A, d does not want the 
cash if a check is just as good to him. So d deposits the 
check of a in his bank B. Now the bank B becomes the 
owner of the check drawn by a on the bank A. In a simi- 
lar way e pays r by a check on bank B, and c deposits it 
in bank A. Thus bank A has a check, or demand, on 
bank B ; and bank B has a check, or demand, on bank A. 
So it goes on in all the other groups who deal with banks 
C and D. There will be checks given by g to k^ by m to 
/z, and cross-payments by b to g^ by m to d^ etc. If each 
bank demanded cash for every check it held against an- 
other bank, there would be a constant carrying of money 




152 EXCHANGE. 

back and forth between the banks. This useless and risky- 
transfer of money between the banks is obviated by resort 
to a clearing-house. The bank A presents there its checks 
against banks B, C, and D, and these banks present all 
their checks against bank A. So, likewise, with B and 
each other bank. They assemble in a room called a 
clearing-house, where these checks are brought and offset 
against one another, and only the balances are paid in 
money. In the clearing-house there is a circular railing 
containing as many openings as there are banks in the as- 
sociation. At a given time, a clerk from bank A appears 
outside the opening assigned to his bank, and hands in all 
his checks against the other banks, and the sum of these 
checks is the amount demanded from the other banks. 
Then a clerk inside distributes the bundle of checks, by 
dropping each check on the counter opposite the opening 
of the bank on which the check is drawn. The same is 
done with the checks belonging to B, C, and D. Then 
all the checks dropped at the opening of bank A represent 
the sum of demands against his bank. The. difference be- 
tween the claims of bank A against other banks and the 
claims of the other banks against bank A can then be 
paid ; but balances are very small in comparison with the 
sum total of transactions. In the year 1881, at the clear- 
ing-house in New York city, goods to the value of $48,- 
565,818,212 were exchanged, and only three and a half 
per cent of this sum was paid in money to settle balances. 
To such a marvelous extent has the system of checks and 
deposits saved the use of money. 

142. We have thus described the various forms of 
credit. Credit itself consists of the use of another's wealth, 
with the understanding that this wealth will be returned 
in kind ; and the exercise of credit gives rise to book- 
credit, bills of exchange, notes, and checks (based on the 
deposit system). Just as the curling smoke disclosed to 
the Indian the location of an encampment, so the exist- 



CREDIT. 



153 



ence of these forms just mentioned signifies in some way 
the exercise of credit. To any one who can get credit, 
it is purchasing power. The amount of goods a man 
can purchase is represented not only by the sum of money 
he has, but by his money together with his credit. The 
demand created by a man for goods in the market, there- 
fore, is made up of the money he can offer, together with 
the credit he is given. But, as we found (in section 99) 
that demand affects prices in the market, we can also see 
that credit must affect prices. An increased demand in- 
creases prices ; and, as an increased use of credit increases 
demand, an increased use of credit raises prices. Cred- 
it, therefore, can influence prices as much as the offer of 
money. Mr. Mill tells of a person buying corn (1838-42) 
who had a capital of only $25,000, but who made pur- 
chases which amounted to between $2,500,000 and $3,000,- 
000. This shows the extent to which credit can be ex- 
panded, and we can see what an influence so large a 
demand (made possible by the credit given him) may have 
in raising the prices of commodities. 

143. The price of a thing is its value expressed in the 
material used as money ; its price is the quantity of money 
for which it will exchange (see section 61). If we suppose 
all commodities, A, on one side to be exchanged against 
all the money in circulation, B, on the other side, the 
prices will be such that all the commodi- 
ties would exchange for all the money. 
The level of prices, then, can be found by (1) 
comparing all the goods offered for sale 
with all the money offered for goods (i. e., 
all in circulation). In the annexed figure 
the level of prices would be high or low, 
accordingly as B was great or small rela- 
tively to the goods, A. If the money, B, 
were increased, while A remained the same, the level of 
prices would be higher, and vice versa. That is, other things 
12 



B 



154 



EXCHANGE. 



C 
B 



remaining the same, an increase of money increases prices, 
and a diminution of money diminishes prices in general. 

Since by the use of credit purchasing power additional 
to that of money is offered for goods, prices must be af- 
fected accordingly. We can not, then, say that the level 
of prices in a country is that produced by comparing 
goods offered for sale (A) solely with the money in circula- 
tion (B). The level of prices at any time can be found 
only by comparing the goods (A) with 
the money in circulation (B) plus the 
($) -7- credit (C) used ss purchasing power. 

If in the adjoined figure (2), A repre- 
sented the same quantity of goods to be 
exchanged, as in figure (i), the level of 
prices would be found by comparing A 
with B plus C. The resulting ratio, we 
can see, would be very different from 
that in figure (i). When credit is taken into account, the 
range of prices is affected just as if more money were in 
use ; when money and credit (B and C) are compared with 
the commodities offered for sale (A), prices are on a higher 
level than before. The values of the particular commodi- 
ties, however, are not changed, because prices are higher 
than before. To suppose they were, would be making the 
mistake of thinking that two things, which still exchange 
for each other, although at higher prices, are not equal in 
value. In short, an increase of credit affects prices in just 
the same way as an increase of money. When the com- 
modities offered for purchasing power remain the same, 
an increase in the quantity of money raises prices ; and 
the same thing happens when credit is increased. Con- 
versely, prices would fall if either money or credit were 
diminished in volume. It is as if a boy had placed one 
chair upon another, and seated himself on top ; he can 
be brought down from his height by subtracting either 
chair from underneath him. 



CREDIT. 155 

144. The way in which an expansion of credit raises 
prices and a contraction of credit lowers prices, excess- 
ively, without any change in the quantity of money in the 
country, may be seen by Mr. Jevons's account * of the 
progress and end of a commercial crisis : *' There can be 
no doubt that in some years men become confident and 
hopeful. They think that the country is going to be very 
prosperous, and that if they invest their capital in new 
factories, banks, railways, ships, or other enterprises, they 
will make much profit. When some people are thus 
hopeful, others readily become so too, just as a few cheer- 
ful people in a party make everybody cheerful. . . . Clever 
men then propose schemes for new inventions and novel 
undertakings, and they find that they can readily get capi- 
talists to subscribe for shares. . . . When the schemes . . . 
begin to be carried out, great quantities of materials are 
required for building, and the prices of these materials 
rise rapidly. The work-people who produce these mate- 
rials then earn high wages, and they spend these wages in 
better living, in pleasure, or in buying an unusual quantity 
of new clothes, furniture, etc. Thus the demand for com- 
modities increases, and trades-people make large profits. 
. . . Every trader now wants to buy, because he believes 
that prices will rise higher and higher, and that, by selling 
at the right time, the loss of any subsequent fall of prices 
will be thrown upon other people. 

" This state of things, however, can not go on very 
long. . . . Manufacturers, merchants, and speculators, who 
are making or buying large stocks of goods, wish to borrow 
more and more money, in order that they may have a 
larger business, the profit seeming likely to be so great. 
Then, according to the laws of supply and demand, the 
price of money rises, which means that the rate of interest 
for short loans, from a week to three or six months in du- 

* " Primer of Political Economy," pp. 1 16-1 19. 



156 EXCHANGE. 

ration, is increased. The bubble goes on growing, until 
the more venturesome and unscrupulous speculators have 
borrowed many times as much money as they themselves 
really possess. Credit is said to be greatly ex- 
tended. . . . 

145. " But the sudden rise which, sooner or later, oc- 
curs in the rate of interest, is very disastrous to such 
speculators ; when they began to speculate interest was, 
perhaps, only two or three per cent ; but when it becomes 
seven or eight per cent, there is fear that much of the 
profit will go in interest paid to the lenders of capital. 
Moreover, those who lent the money, by discounting the 
speculators' bills, or making advances on the security of 
goods, become anxious to have it paid back. Thus the 
speculators are forced at last to begin selling their stocks, 
at the best prices they can get. As soon as some people 
begin to sell in this way, others who hold goods think they 
had better sell before the prices fall seriously ; then there 
arises a sudden rush to sell, and buyers being alarmed, 
refuse to buy except at much reduced rates. The bad 
speculators now find themselves unable to maintain their 
credit, because, if they sell their large stock at a con- 
siderable loss, their own real capital will be quite in- 
sufficient to cover this loss. They . . . stop payment, or, 
in other words, become bankrupt. This is very awk- 
ward for other people, manufacturers, for instance, who 
had sold goods to the bankrupts on credit ; they do not 
receive the money they expected, and as they also, per- 
haps, have borrowed money while making the goods, they 
become bankrupt likewise. . . . 

146. " Not only does this collapse ruin many of the 
subscribers to these schemes, but it presently causes work- 
people to be thrown out of employment. . . . No one vent- 
ures to propose new [schemes] ; people have been fright- 
ened by the losses and bankruptcies and frauds brought 
to light in the collapse, and when some people are afraid, 



CREDIT. 



157 



Others readily become frightened likewise by sympathy. 
... In a year or two the prices of iron, coal, timber, etc., 
are reduced to the lowest point ; great losses are suffered 
by those who make or deal in such materials, and many 
workmen are out of employment. The working-classes 
then have less to spend on luxuries, and the demand for 
other goods decreases ; trade in general becomes depressed. 
. . . Such a state of depression * may continue for two 
or three years, until speculators have begun to forget their 
failures, or a new set of younger men, unacquainted with 
disaster, think they see a way to make profits. . . . After 
a time, bankers, who were so very cautious at the time of 
the collapse, find it necessary to lend their increasing 
funds, and credit is improved. Then begins a new credit 
cycle." 

147. Exercises. — i. A borrows $1,000 from a bank. 
B, a farmer, had just deposited in the bank $1,000 in 
money, so that A was able to get the loan. How did B 
probably get his $1,000 of money to deposit ? When A 
parts with the borrowed money in buying goods, does 
he still have the loan ? If A should buy wheat, whose 
wealth may he be using through the intervention of the 
bank 1 

2. Is book-credit of use as purchasing power to any 
one else than the two persons mentioned in section 135 ? 
Can the grocer's accounts be passed along as a substitute 
for money ? Can a note ? 

3. A is an agent in New Orleans buying cotton. On 
shipping 1,000 bales to New York, he draws a bill for the 
price paid on the firm B in New York for whom he has 
bought the cotton. If C in New Orleans wanted to pay 

* In years of depression we hear most of the irrational theories of 
a general over-production in all industries. It is only an ill-adjusted 
production which has been caused by the ruinous speculation ; and, as 
soon as the adjustment is properly made, people go on producing far 
more than in the years when they talked of over-production. 



158 EXCHANGE. 

for dry-goods bought from D in New York, how could he 
make use of A's bill on New York ? Write out the bill 
and the indorsement. 

4. Look at a greenback and see whose promissory note 
it is. Do the same with a national-bank note. 

5. Get a blank check and see how it reads. If it reads 
*' pay to bearer," can any one get it cashed ? If it reads 
" pay to the order of John Doe," can any one else than 
John Doe get it cashed .'' Why is it safer, in sending a 
check by mail, to make it payable to the order of a per- 
son ? Why must a stranger be '' identified " at a bank 
when he wants a check cashed ? 

6. Let the members of the class be supposed to deal 
with three banks. Let each member make out a check. 
Then form a clearing-house, and strike a balance between 
the various banks. 

7. If a man gives $100 in gold for clothing, and gets 
provisions on credit to the amount of $50, what is the 
whole amount of his demand for commodities ? Would 
the price of provisions be affected if many persons should 
be unable to get credit, who had had it before ? 

8. Why do prices rise in the beginning of a speculative 
period ? Why do they fall as soon as the tide turns ? 

9. Why is it hard to borrow, or to get credit, in the 
crisis of a commercial panic ? Why is it hard to get any- 
thing when everybody wants the same thing ? 



CHAPTER XV, 

PAPER MONEY. 

148. Paper money arose from that form of credit 
which we have described as a promissory note. People 
became accustomed to receive the promise instead of the 
thing promised. The idea was understood before gold 
and silver were used as money. '' One of the earliest 
mediums of exchange," says Mr. Jevons,* " consisted of 
the skins of animals. The earliest form of representative 
money consisted of small pieces of leather, usually marked 
with an official seal. It is a very reasonable suggestion 
. . that, when skins and furs began to be found an in- 
conveniently bulky kind of money, small pieces were 
clipped off, and handed over as tokens of possession. By 
fitting into the place from which they were cut, they would 
prove ownership." The common form of paper money, 
such as the modern bank-note, however, originated with 
the deposit-banks of Italy, established from four to 
seven centuries ago.f The coins of Venice and Italy were 
of many values, often clipped and worn. To save weigh- 
ing each coin at every transaction, the coins were depos- 
ited in the banks, where they were weighed, and a credit 
given to the depositor on the books of the bank. Thus 
transfers of the metallic money credited to a depositor 
came to be used instead of the money itself. 

* " Money and the Mechanism of Exchange," p. 196. 
f Ibid., p. 199. 

(159) 



l6o EXCHANGE. 

Moreover, so long as the promise is always found 
trustworthy, the note which promises to pay gold or silver 
is a great convenience to trade. It saves the 
trouble and risk of handling large sums of the pre- 
cious metals. Any large sum of money is very bulky. In 
Mexico, where roads are unsafe, and where silver is the 
only money, a cotton-mill retains its own company of sol- 
diers to guard the agents when they go out to collect bills. 
Even in more civilized countries the transportation and 
handling of large sums of specie is very hazardous. 

149. Paper money, for which there is not the slightest 
doubt that specie can be obtained on demand, is 
called convertible paper. The distinctive quality of 
good paper money is that it can be converted into gold or 
silver at any time. No paper money is good unless the 
promise to pay means what it says, and unless the con- 
vertibility is constantly tested. Since the resumption of 
specie payments in the United States on January i, 1879, 
our " greenbacks," or United States notes, are examples 
of convertible paper money. By taking one of these notes 
to a Government sub-treasury, you can get gold for it, dol- 
lar for dollar. On reading the words on a United States 
note, you will see that it is a promise of the United States 
to pay to bearer a certain number of dollars (in coin). The 
notes issued by the national banks in this country are 
promises of the given bank to " pay the bearer on de- 
mand " a certain number of dollars ; but in the latter case 
these dollars may be any kind of " lawful money " of the 
United States. A national-bank note, therefore, may be 
convertible into United States notes ; but, so long as the 
latter are as good as gold, the national-bank notes will 
be also. 

150. If you examine the back of a United States note, 
you will see the words : " This note is a legal tender at 
its face value for all debts^ public and private, except duties 
on imports and interest on the public debt.'' A legal tender is 



PAPER MONEY. l6l 

that kind of money which the laws of the United States 
declare to be a full acquittal when offered in payment of 
a debt. If you promise to pay one hundred dollars five 
years from date, and say nothing in the promise as to the 
kind of payment, you may satisfy the creditor by giving 
any kind of money which may then be a legal tender. At 
present gold and silver coins of denominations of one dol- 
lar and upward are legal tender to any amount ; but sub- 
sidiary silver — the fifty, twenty-five, and ten cent pieces — 
can be offered in sums no greater than ten dollars ; and 
lower denominations of nickel and copper are legal tender 
to the amount of only twenty-five cents. The United 
States notes * are legal tender for all purposes except 
duties on imports and interest on the public debt. Some 
people, however, think that legal-tender money can be 
offered for goods in a store, and that the shop-keeper is 
obliged to hand over the goods. This is absurd ; for no 
one can be obliged to part with his property in any such 
way against his will. Before goods are purchased there 
is no debt created for which money can be offered as a 
legal means of payment. 

151. The step from the actual use of gold and silver 
to promises to pay gold and silver was easily made, and as 
long as the promise was faithfully kept such kind of paper 
money was very convenient and economical. The next 
step also was easy. The experiment was tried of issuing 
promises to pay without having anything with which to 
pay. During our civil war (February 25, 1862) the United 
States began to issue United States notes (" greenbacks ") 

* The national-bank notes are not legal tender for private debts, but 
are, in the language of the act of June 3, 1864 (section 23), " received 
at par in all parts of the United States in payment of taxes, excises, 
public lands, and all other dues to the United States, except for duties 
on imports ; and also for all salaries and other debts and demands 
owing by the United States to individuals, corporations, and associa- 
tions within the United States, except interest on the public debt and 
in redemption of the national currency." 



1 62 EXCHANGE, 

when the Treasury was practically empty, and when there 
was no intention of redeeming them at that time. Such 
paper money is called inconvertible paper, and is an 
evidence of bad financial management. It is practically 
a confession of bankruptcy. When a merchant can not 
meet his note, it is protested, and his credit is ruined ; bat 
governments are generally given more confidence. If the 
notes issued are promises to pay, account must be taken 
of the possibility that the issuer will eventually be able and 
willing to redeem the promise. This possibility is con- 
nected with the quantity of notes issued. The quantity 
of inconvertible paper in circulation chiefly affecti 
its value. If the Government is reckless in issuing un- 
limited quantities of paper money, that is increasing evi- 
dence that the currency may not be redeemed at its full 
value. Consequently, inconvertible paper is Hable to de- 
preciate, or to fall below its face value.* During the 
civil war, when the greenbacks were inconvertible, a prom- 
ise of the United States to pay a dollar in gold fell in 
value as low as thirty-five cents in gold ; for once, in 1864, 
it required two dollars and eighty-five cents of paper to 
buy one dollar of gold. On January i, 1879, however, the 
Treasury had collected gold enough with which to redeem 
its promises, and since that time (when it was said that 
specie payment was resumed) a United States note has 
been convertible paper money. The depreciation ot 
United States notes from 1862 to 1879 may be seen in 
Chart VI, which shows the premium on gold. Of course, 
as the line goes upward, the value of paper depreciates 
because it requires mere paper to buy gold than when 
the line falls. For seventeen years the promise of the 
United States to pay in coin was not worth its face value. 

* In 1 78 1 the inconvertible paper issued by the Continental Con- 
gress became worth nothing ; in fact, so entirely without value was this 
paper money that we still have a by-word for any worthless thing (" Not 
worth a continental "), derived from this experience. 



PAPER MONEY. 



163 




1 64 EXCHANGE. 

152. The descent to Avernus is easy. For an impe- 
cunious state, the step from putting out promises which 
are not redeemable to issuing a still worse kind of paper 
money is quite natural. The Government, seeing paper 
pass from hand to hand as money, conceived that the au- 
thority of the State would be sufficient to give value to 
paper which had no intrinsic value in itself, and which 
was not even a promise to pay value. It created fiat 
money. Instead of reading, " The State promises to pay 
one dollar," the fiat money reads, " This is a dollar." Such 
was the character of some of the paper money issued by 
the colonies. In Rhode Island the issues read as follows : 
" This three- shilling bill due from y* colony of Rhode Isl- 
and, &c. to the Possessor shall be equal to money," etc. 
This kind of paper depreciated until it was comparatively 
worthless. In truth, such paper money would have had 
no value had it not been for the fact that the laws gave 
it a certain power to pay debts, and that it was received 
by the State for taxes. No policy can be worse than that 
which leads a state to declare that a piece of paper shall 
have value when it has none. If the State is willing to 
take the paper instead of gold or silver, it establishes 
thereby a means of redeeming it to a certain extent, and, 
if there were little of it in circulation, it is possible that 
it may have full value. But, in every case in the past, this 
kind of paper has been issued in undue quantity, and has 
depreciated enormously. The finances of a State must be 
egregiously mismanaged if it is forced to issue inconverti- 
ble money, to say nothing of " fiat money." It is a con- 
fession that a country can not, by legitimate borrowing or 
by taxation, get the means of paying its expenses, and that 
it is necessary to resort to a trick like issuing false money. 

153. From various causes, inconvertible paper, 
however, often has value to a greater or less extent. 
It is probably at first issued as convertible paper, 
and is received by the people as such. Thus, at the start, 



PAPER MONEY. 165 

there was an intention to keep its value intact. Too 
often, also, not enough account is taken of the habits of 
a people in regard to money. The name for a coin 
retains an association of value independently of changes 
in its weight or character. People easily fall into ruts in 
regard to things which are intricate and puzzling. The per- 
sistence of monetary names is shown by the fact that in 
the city of Boston goods are sold over counters to-day, and 
reckonings made with purchasers, in the names of coins 
(such as "ninepence" and "shilling") which have had 
no legal existence since 1792, and have not been in circu- 
lation for generations. So, when persons get a fixed idea 
of a dollar in gold, or in a sound paper money convertible 
into gold, and are accustomed to reckon prices in it, they 
are very easily led into taking inconvertible money in 
much the same way, because it also is expressed in terms 
of dollars, or the same units. Even though the paper depre- 
ciates, it will be persistently said, " A dollar's a dollar, and 
you can't make it anything else." It is not realized that 
the dollar changes in value, and that it is only a means of 
exchanging goods, not an end in itself. As Mr. Jevons * 
says: "After the promise of payment in coin is found to 
be illusory, the notes still circulate, partly from habit, 
partly because the people must have some currency, 
and have no coin to use for the purpose, or, if they have, 
carefully hoard it for profit or future use." Moreover, in- 
convertible paper is given more or less value by impressing 
on it the legal-tender quality. When the State receives 
it for taxes, or for customs, and when it can be used to 
discharge debts, it is so far put on an equal basis with 
good money, and it acquires some value. But in the end, 
when issued to any considerable amount, not even the 
legal-tender quality, or habit, can save it from deprecia- 
tion. There is scarcely a case in history where, when 



* «« 



Money and the Mechanism of Exchange," p. 234. 



1 66 EXCHANGE. 

once begun, the first step has not been followed by a 
great expansion of the issues, and a consequent deprecia- 
tion. Of paper money Webster said : " We have suffered 
more from this cause than from every other cause or ca- 
lamity. It has killed more men, pervaded and corrupted 
the choicest interests of our country more, and done more 
injustice, than even the arms and artifices of our enemy," 
154. As soon as inconvertible paper has slightly de- 
preciated, it drives out coin, or convertible money. This 
takes place under the principle of Gresham's Law : 
Bad money drives out good money, but good 
money can not drive out bad money. The manner 
in which it works is simple, and may be thus illustrated : 
Suppose that the paper has depreciated so that a dollar 
of it is worth only ninety cents in gold (as was the case 
in June, 1862 ; see Chart VI), and suppose also that you 
have a debt of $1,000 to pay. If both gold and paper are 
legal payment of your debt, in which will you pay .? With 
$900 in gold you can buy $1,000 in paper, and with that 
pay your debt; by paying the debt in gold, $100 more of 
gold would be needed. There is thus a premium in favor 
not only of using paper, or the cheapest money, but also 
of selling the gold as merchandise, or exporting it. People 
will generally follow the easiest way of paying which is 
permitted by the law of the land. As now constituted, 
men, when required to pay one hundred cents, do not 
choose a dollar worth one hundred and ten cents when a 
poorer money serves equally well to extinguish the debt 
(that is, if both kinds of money are legal tender). Thus 
the poorer money drives out the good. During the 
whole period of the depreciation of United States notes, 
1862-1879 (see Chart VI), our country was exporting its 
gold in large quantity. The money in general use was 
paper money, and gold was not in circulation (gold being 
used only for paying customs duties to the United States, 
and for interest on the national debt). The reason why 



PAPER MONEY. 1 67 

gold was exported, leaving only paper at home, was that 
the United States paper would not circulate beyond the 
limits of our own country. The paper money is a legal 
payment only according to our own laws, and conse- 
quently is not received as a legal payment by foreigners. 
Hence, when payments are to be made abroad, metallic 
money is always sent. 

155' We have already seen that an increase of money 
or credit raises prices (section 142). A change in prices 
indicates a change in the value of money. When incon- 
vertible paper money depreciates, paper prices necessarily 
rise as the paper depreciates, A pair of gloves, selling 
for one dollar in gold, will, when paper depreciates to 
ninety cents, sell for one dollar and ele /en cents in paper ; 
when the paper depreciates to fifty cents in gold, the gloves 
will sell for two dollars. And, since depreciated paper 
money drives out gold and silver, the paper will be the only 
money in use, and prices will be reckoned only in paper; 
so that, if the paper money rises and falls in value, as our 
United States notes did during the war, prices will be 
constantly changing. This is an evil to trade which 
can not be overestimated. If a manufacturer or merchant 
does not know what the price of his goods or materials 
will be a week ahead, he is cut off from any legitimate 
estimate of his coming receipts or expenses, and is obliged 
to guess at the course of the market. This, however, is 
mere Speculation, and trade is consequently turned into 
betting and gambling as to the change of prices — one man 
gains at another's loss. This speculative spirit changes 
the whole moral tone of business, and transforms trade 
into a system of wagers. Then, too, speculation aggravates 
the changes in prices. An increase of paper money raises 
prices ; but speculators, who believe that prices are going 
up because of an issue of more paper, will try to get on 
hand as large a stock of goods as possible before the rise, 
in order to sell out when the rise comes. This creates an 



1 68 EXCHANGE, 

excessive demand at times, and under it prices are ad- 
vanced far higher than they would be merely by the issues 
of paper. Speculation (engendered by the issue of paper) 
raises prices beyond the limit established solely by the 
extension of the quantity of paper ; and so, as prices have 
risen in a greater proportion than the increase of the 
money in circulation, a difficulty is experienced in ex- 
changing goods for money. Money seems scarce, although 
more has lately been issued. So it has been after an ex- 
cessive issue of paper money, whenever it has been tried. 
The more there is issued, the more is craved, and the Gov- 
ernment is never able to withstand the demand for more 
of this financial intoxicant.* 

156. There is a delusion, fatal in its bad results, to the 
effect that a period of inflation and high prices is a period 
of prosperity. Those who are ignorant of the nature and 
functions of money think that, when prices in paper rise, 
the dollar is the same that it was before the rise. A 
farmer, for example, has a piece of land valued at f 1,000 
in gold ; then comes an issue of paper, and prices rise to 
double what they were before. Now the farmer, finding 
that his piece of land is valued at $2,000 (in paper), with- 
out reflecting that the paper " dollar " is worth but one 
half as much as before, and that his land is worth no more 

* " It is my firm belief that the issue of inconvertible paper money 
is never a sound measure of finance, no matter what the stress of the 
national exigency may be. I believe it to be as surely a mistaken policy 
as the resort of an athlete to the brandy -bottle. It means mischief 
always. If there is ever a time when a nation needs its full collected 
vigor, with a steady pulse, a calm outlook, a hand and a brain undis- 
turbed by the fumes of this alcohol of commerce — paper money — it is 
when called to do battle for its life with superior force. It is, to my 
mind, the highest proof ever afforded of the supreme mtellectual great- 
ness of Napoleon that, during twenty years of continuous war, often 
single-handed against half the powers of Europe, he never was once 
driven to this desperate and delusive resort." — F. A. Walker, *' Political 
Economy," p. 169, note. 



PAPER MONEY. 



169 



than $1,000 in gold ^ is often deluded into thinking that he 
is twice as rich as he was. Although all that he sells is 
doubled in price, all that he buys is likewise doubled, and 
the products he sells bear the same relative value to what 
he buys as before. He now sells his wheat for double the 
money he did formerly, and he gives double the money 
for clothing and dry-goods, so that he is just where he was 
before. Not understanding this, however, people often 
believe that when prices rise they are richer than 
they were before — that they are worth more in "dol- 
lars." They do not reflect that each " dollar " is worth 
less in the proportion that the prices have risen. This 
delusion leads them to buy more lavishly, and display 
greater extravagance. This explains why the period 
after our war was one of only apparent prosperity, and 
why it generated that boundless extravagance and great 
extension of credit which caused a reaction in the dis- 
astrous commercial crisis of 1873, from which we were 
years in recovering. 

I57» High prices, however, seem desirable to many 
people for very different and for dishonest reasons. High 
prices and inflation, under cover of law, enable debtors to 
levy a forced contribution on their creditors, to pay their 
debts with less wealth than they borrowed. It would 
hardly seem necessary to refer to such degraded morals, 
were the policy of inflation not openly advocated on such 
grounds. To those who think stealing is no wrong, such a 
method of escaping from just obligations may commend it- 
self. We have already pointed out (section 72) that long 
contracts should not be settled by a standard of gold, silver, 
or any money. The debtor should pay back just what he 
received — no more, no less. The farmer referred to, when 
his land was valued at $1,000 in gold, may have mortgaged 
it for $500. After prices have risen by an issue of paper, 
his products will sell for more paper dollars than they did 
for gold dollars, and yet each paper dollar (if legal tender) 
13 



170 



EXCHANGE. 



pays off one dollar of his original loan of $500 which he 
received in gold. Thus, after paper prices have riscxi, it 
will not require the sale of so many of his products to 
pay off his mortgage as it would have required with gold 
prices. This is only another way of saying that the farmer 
gives back less than he receives. It is, therefore, 
unjust to make inconvertible paper, which is morally cer- 
tain to depreciate, a legal tender iox past debts. A large 
amount of capital loaned in this country is made up of the 
savings of people with small incomes, and they can not 
afford to have the provision for their old age thus eaten 
up by unjust acts of debtors under the guise of legal-tender 
laws. It is a reason why even convertible paper should 
not be made legal tender, that it may in some emergency 
become inconvertible and depreciate, and produce the 
effects of robbery. 

158. Exercises. — i. In the middle ages a twig, or a 
clod, was handed by the seller to the buyer as a sign that 
the ownership of the property was transferred. Was there 
any likeness to paper money in this procedure ? 

2. A deed is a title to a piece of land. Is a promise to 
pay gold on demand something of the same kind .? 

3. Could you oblige a customs official to-day to receive 
a national-bank note in payment of duties 1 

4. What is the advantage of having a convertible pa- 
per money ? 

5. Is there any cost of production (beyond paper and 
printing) for paper money below which its value can not 
fall by an increased supply of it ? Is it the same with 
gold? 

6. With the word dollar we associate some idea of 
value. If a paper money were printed so as to read " This 
is a George Washington " instead of " This is a dollar," 
would it make any difference to people in receiving it ? 

7. President Garfield once said, in a speech, that we 
did not export paper money, for the same reason that we 



PAPER MONEY. 



171 



could not export bad cheese or rancid butter. Wherein 
is the resemblance ? 

8. Men properly accumulate wealth by producing it. 
In what different way than this do they gain wealth by 
fluctuations in the prices of commodities due to changes 
in the currency ? 

9. What tendency has an era of high prices upon the 
use of credit ? If people are really no richer when paper 
prices have risen, how do they get increased purchasing 
power ? 

10. Name some of the different legal ways in which 
you can pay a debt of $25 to-day. What different kinds 
of money can you use, and to what amounts ? 



BOOK III. 



DISTRIBUTION 



(173) 



CHAPTER XVI. 

THE PROBLEM OF DISTRIBUTION. 

159. In Book I we were concerned with the produc- 
tion of wealth, and with inquiries as to the possibility of 
increasing wealth ; in Book II we investigated the causes 
which give value to what is produced, and we explained 
the methods by which those products are exchanged against 
each other by means of money and the various forms of 
credit ; in Book III we shall discuss the question of the 
distribution of what has been produced among the per- 
sons who have had a share in its production. Until we 
had learned the principles of value which determine the 
total amount to be divided, it was not possible to discuss 
properly the respective sums which each party to the pro- 
duction should receive out of that total amount. This 
brings us to study the principles which govern the sums 
paid to the laborer, to the capitalist, and to the owner of 
land, and the respective shares of these persons will be 
treated under the head of wages, interest, and rent. 

160. In the first place, we may pass by rent, or the 
share of the landlord. It will be later seen (in Chap- 
ter XXII) that no error is committed by doing so. In 
regard to the total value of articles of ordinary manufact- 
ure, or of articles produced on land which pays no rent, 
the question of distribution is one solely between the 
laborer and the capitalist. 

In case a manufacturer pays a rent for the use of land 

(175) 



1/6 DISTRIBUTION. 

on which his buildings stand, or for water-power, or other 
gifts of Nature, it can be regarded simply as an additional 
outlay of capital. The return to this outlay is a return to 
capital. The same may be said of taxes and insur- 
ance. Such payments to the Government, or to insurance 
companies, require more capital to be advanced by the 
employer, and a return is expected from this outlay, just 
as in the case of capital which expects more interest when 
it is invested a longer time. When an employer makes 
advance payments for ground- rent, taxes, or insurance on 
his buildings or materials, additional capital is to that ex- 
tent required ; and an additional sacrifice is exacted from 
the owner of capital, for which there must be made a re- 
turn in proper proportion to the return made to any other 
capital. 

The question for us to decide, then, is solely the prin- 
ciple of division between the capitalist and the laborer. 
Although the two things are dependent on each other, we 
shall first consider the share belonging to capital ; after 
that, we can proceed to discuss the principles which gov- 
ern the distribution of the laborer's share. 

l6l. It may be necessary, however, to describe more 
fully the product which is to be divided. In any indus- 
try, of course, the actual products are not divided between 
labor and capital ; in a stove-foundry laborers are not paid 
in stoves. What we mean by speaking of the product is 
the exchange value of that product ; and in a stove- 
foundry the value of the stoves expressed in money and 
goods is what is divided between the persons concerned 
in their production. 

It is also to be understood that we are not speaking of 
a single article, or unit, of the goods made, when we are 
discussing the value of the product to be distributed ; we 
have in view the total production of the industry in a 
given period of work, such as a month, or year, or season. 
Thus, in six months, or a year, 10,000 stoves may be 



THE PROBLEM OF DISTRIBUTION. 



177 



manufactured and sold ; and our problem is to discover 
what proportion of the value, or equivalent, of these 10,000 
stoves — not of one single stove — goes to the laborer, and 
what proportion goes to the capitalist. 

162. The value of this product will vary according to 
the laws of value discussed in previous chapters. The 
sacrifice to capitalist and laborer will (where competition 
is free) regulate the value of manufactured goods in 
general. Fluctuations in market values, or the action of 
reciprocal demand between different groups of industries, 
may, however, cause this sum total to vary in amount, 
and thus yield a larger or smaller value to be divided. 
Thus, when '' business is poor," and demand is slack, the 
value of the annual sales in a mill may be less than usual, 
and less may exist for both labor and capital ; or when 
"business revives," and "buyers are plenty," the better 
demand from people in other groups of industries raises 
the value of the total production, and increases the sum to 
be divided. Ignorance of this variation in the sum to be 
divided has been the basis of many errors by strikers. 
They have often demanded an increased share for wages 
just at a time when the total value of the product was di- 
minishing. If they act at a time when this sum is rising 
in value, they are more likely to succeed. 

163. A very important matter to keep in mind, also, 
in regard to the share of labor and capital is the quantity 
of the product compared with the sacrifice to labor 
and capital (that is, compared to the number of days' 
labor on the average, and to the amount of capital em- 
ployed). If we were to employ $500 of capital with 100 
days of unskilled labor in growing wheat in New Jer- 
sey, we might reap 100 bushels ; but if the same amount 
of labor and capital were applied to the virgin prairie soil 
of some great wheat-growing district in the West, like Da- 
kota, it might easily produce 150 bushels. The same labor 
and capital was used in both places, but the total product 



178 



DISTRIBUTION. 



DAKOTA 



A 




B 


N*EW JERSEY 




a 




b 





in the one case was much larger than in the other. Thus 
there was more to divide between labor and capital in 
Dakota than in New Jersey. If capital were to have one 
tenth of the product in each case, it can be seen by the 

adjoining figure that in Dakota 
the share A, which is one tenth 
of the whole, is a larger quanti- 
ty than a, which is one tenth of 
a smaller product in New Jer- 
sey. Likewise B is greater than 
d, because it is nine tenths of a 
larger sum than in New Jersey„ 
To express it in other words, 
nine tenths of a large loaf is 
more to a laborer than nine 
tenths of a small one. The re- 
turns to both labor and capital, consequently, will be high 
in countries where the return to the exertions of labor 
and the use of capital are great. 

164. The reasons why this return is great are illus- 
trated by the causes which are in active operation in the 
United States. The vast extent of our rich agricultural 
land, our great mineral deposits, our supply of natural 
products (like petroleum), are the sources of great indus- 
trial advantages. With these conditions we must take into 
account a population already highly civilized at the time 
when that portion of the country was first occupied ; the 
inventive character of the people ; the appliances and ma- 
chinery in all industries which enormously multiply the 
productive power of men ; the water-ways and network 
of railways which afford easy and rapid transportation both 
for men and ideas ; and such density of population as per- 
mits of an organization of efforts, and a division of labor 
on an advantageous scale. These are some of the causes 
which in a new country make the return to labor 
and capital very much higher than in an older or a 



THE PROBLEM OF DISTRIBUTION. 



179 



less favored country.* The return to a given exertion of 
labor, and to the use of a certain sum of capital in most por- 
tions of the United States is greater than that in England 
or on the Continent. The loaf of bread to be divided is 
larger in the United States than in Europe. This is why 
both wages and interest are generally higher here than 
abroad. 

165. We can not insist too carefully on keeping this 
before us in discussing the rewards to labor and capital. 
It fixes the level, or plane, on which the principles we 
arrive at for governing wages and interest will operate. It 
makes a great difference whether these principles operate 
on the high level of a great quantity of product or on the 
low level of a small quantity of product. If the share of 
labor varies, as compared with the share of capital, in the 
two cases it will vary on different levels. The height of 
the line A might represent the productiveness of an in- 
dustry in the 

i-r ^ — v^ 

Y 



United States, 
and that of B 
the relative 
productive- 
ness of the 
same industry 
in Europe. If 
A and B are 
divided in the 
same propor- 
tion (say one tenth for interest and nine tenths for wages), 
the share for capital, I, and the share for wages, W, will 
be much greater in the case of A than of B. In the first 
case, the point of division will be on the level of X, and in 

* This will be true also between parts of the same country, differ- 
ently favored by Nature, so long as competition between them is not 
free. If labor and capital will not move freely between them, the rates 
of wages and interest may be higher in one part than in another. 




W 



W 



l8o DISTRIBUTION. 

the second case on the level of Y. Now, if there are vari- 
ations in the shares of wages and interest relatively to each 
other (while the total product remains the same), the point 
of division will move up and down about the level of X for 
A, as indicated by the curved line, and for B up and down 
about the lower level of Y. We have not yet found out, 
of course, where to draw the point of division between 
wages and interest (that is, the places X in A and Y in 
B) ; that is our problem in Book III. But, when we do 
arrive at this principle, we must remember that it makes a 
vast difference whether it applies to a large or small divi- 
dend, to A or to B. If a father dies leaving his property 
to his two children in equal shares, it makes a great differ- 
ence, so far as the share of each child is concerned, whether 
each receives one half of a large or one half of a small fort- 
une. 

166. It is also to be remembered that industries vary- 
as regards the amount of labor required in their 
operations ; some demand a large number of laborers with 
a small capital, and others demand a large capital with a 
small number of laborers. Thus farming usually calls for 
relatively many more laborers and less capital than an 
iron-foundry, in which molders and machinists are work- 
ing with machinery and buildings and materials which re- 
quire a heavy outlay of capital before the business can be 
begun. As a rule, most manufactories require more la- 
borers to a given amount of capital than agricultural in- 
dustries, though a good deal depends on the character of 
the industry itself, and the kind of machinery used. As 
machinery is improved, a less and less number of work- 
men are required to work and feed it. 

167. Exercises. — i. Apart from rent, between what 
two classes is the main question of distribution concerned ? 

2. Is it correct to say that labor and capital are paid 
out of the product of their industry ? 

3. If the summer is very long and hot, and a strong 



THE PROBLEM OF DISTRIBUTION. i8l 

demand for ice is felt, so that ice rises considerably in 
price, how would that affect the sum from which labor 
and capital in the ice industry is to be paid ? 

4. Two men have respectively a little capital in the 
form of a spade and some seed. One digs up rich soil 
for a day and plants it ; the other digs up poor soil for a 
day and plants it. Why does the first get larger wages 
and interest ? 

5. When Oregon was held by the Modocs and other 
Indians, it was as rich in natural resources as now. Did 
the Modocs get as high wages as settlers do now ? What 
is the reason for the vast difference between their earn- 
ings ? 

6. What effect has the great productiveness of an in- 
dustry on the payments for labor and capital ? If the 
" Mikado," written by Gilbert and Sullivan, is very popu- 
lar, and earns a large royalty for the authors, is it just 
to say that this enlarges Gilbert's share only (without 
having any effect on Sullivan's share) ? Is it just to say 
that the great productiveness of an industry enlarges wages 
only (without affecting the share of capital) 1 



CHAPTER XVII. 

INTEREST. 

168. In many treatises on political economy, and in 
the language of business men, the word "profits" is em- 
ployed to include three different payments, which should 
be kept separate. It is made to cover interest, insurance, 
and wages of superintendence. Interest is, however, the 
payment made solely for the use of capital, and 
wages of superintendence form the reward paid for the 
exertions and skill of the manager. There is an obvious 
error, then, in including both under the term " profit." 
The amount to be paid to a manager for his work as a 
highly-skilled laborer is not determined by the same prin- 
ciple that fixes the rate of the interest which must be paid 
as a return for the use of capital, and it is an unnecessary 
confusion to include them both under the general term 
''profits." 

The wages of superintendence, or the reward of 
the manager, we shall rigorously exclude from our pres- 
ent consideration, which pertains solely to the sum paid 
for the use of capital. The manager's wages will be con- 
sidered hereafter. We can see what constitutes interest 
if we consider the case of a man who puts his capital into 
business with other partners who agree at once to secure 
him against all risk of loss, and to release him from any 
work or any superintendence of the business. 

169. In connection with interest, it is well to consider 



INTEREST. 



183 



the addition made to the rate by the risk attendant in 
each special case on the loan or use of the capital. This 
extra payment, beyond the rate which would be paid for 
undoubtedly safe securities (such, for example, as United 
States bonds), is called insurance. Whenever the re- 
turns from the investment are more or less uncertain, 01 
if the lender has some doubt that he will ever get his capi- 
tal back again, ithe price exacted for the use of the capital 
will rise to a point at which it will (in the opinion of the 
investor) be a compensation for the amount of risk. In 
proportion as the investment is safe, the payment for risk 
will be low ; in proportion as the investment is hazardous 
will it be high. In most enterprises, a very large amount 
is annually set aside as a reserve, or protection against 
losses and years of depression. 

There are many inexperienced persons, having some 
money to invest, who seem to care more for their interest 
than for their principal. They are attracted by a high rate 
of interest, but do not realize that the high rate always 
goes with a high risk.* 

170. The ordinary rate of interest on safe securities 
will not attract capital to an employment which is known 
to be uncertain in its returns, or exposed to dangerous ac- 
cidents. In such industries as mining or the making of 

* A few years ago an institution known as the " Woman's Bank" 
was founded in Boston on a pretended basis of philanthropy, of which 
the chief evidence was its offer to pay eight per cent per month on all 
deposits. The offer of eight per cent a month, or ninety-six per cent 
a year, ought of itself to have warned any informed person of the utter 
untrustworthiness of the bank. Of course, the money deposited never 
earned such returns, and the high rate of interest was paid, not out of 
earnings, but out of the principal left by other depositors. When the 
bank was investigated, and fresh deposits were stopped, the means of 
paying the high dividends ceased, and ignominious failure and prose- 
cution of the manager followed. A little knowledge of what affects 
the rate of interest would have saved many confiding people from seri- 
ous losses. 



1 84 DISTRIBUTION. 

dynamite, for example, the payment for interest must be 
so much beyond the rate paid by money employed in safe 
investments as will cover the average losses, and put the 
business, in the long run, on the same footing as less haz- 
ardous industries. If a gunpowder factory blow up occa- 
sionally, the rate of interest on the capital invested in it 
must be high enough to make up for the mischance. The 
principle involved in the insurance of buildings is the 
same. No one knows just how many houses will burn up 
in a month ; but a fixed charge is paid to the insurance 
company which experience has shown to be sufficient to 
cover average losses. In ordinary business, the rate is 
more or less varied by the circumstances of the country, 
the prevalence or non-prevalence of order or of commercial 
integrity, and the opinion formed as to the honesty of the 
borrower; for all of these circumstances influence the 
investor in estimating his risk of loss. The rate of interest 
is high in rough mining regions, or in places where life is 
held cheap, because the lender feels that his risk is en- 
hanced in such places, and he adds a high charge for 
insurance. The proper payment for such insurance is 
a sum sufficient, in a long term of years, to make 
the returns from a hazardous investment equal to that 
which a safe investment would give throughout the like 
period. 

171. Understanding as we now do the payment made 
necessary by risk and for the wages of the manager, we may 
go on to study the principles which govern the rate 
of interest. We want to learn what determines the 
amount which the owner of capital can demand for its use, 
wholly apart from any payment for risk or for the wages 
of superintendence. 

It is sometimes assumed that this can be fixed by the 
rate of interest paid for the use of capital in the loan 
market ; but the loan market, where some offer and others 
borrow capital, is merely the machinery by which the capi- 



INTEREST. 185 

tal of the country gets into the hands of producers.* The 
rate of interest in the loan market will generally 
be somewhat less than the rate which can be 
earned in production by borrowers, or else there would 
be little reason for borrowing. The market rate will tend 
to follow the rate which can be earned by capital in pro- 
duction, although there will be a thousand causes for tem- 
porary variations about this normal level. The ultimate 
destination of capital is production, and the rate which 
will be paid for its use will depend upon the rate earned 
by producers with their capital. 

172. The connection of the rate of interest in the loan 
market with that earned in productive employments is 
evident. At a time when the market rate is low, the con- 
ditions exist which create a demand for capital in pro- 
duction. Not content with the very low returns offered 
Ijy safe securities, owners of capital begin to look yearn- 
ingly at investments, like mining stocks, which, because 
they are less certain, offer a higher return. Then, too, a 
well-heralded prospectus for a new venture comes out, and 
tempts investors. Moreover, when rates of interest are 
low, even good business managers find that more capital 
can be used in legitimate business, for the reason that it 
can be got cheaply. So the low rate of interest causes an 
additional demand for capital, and in this way calls out 
a demand sufficient to employ the existing supply, or the 
rate will rise to a point at which the whole supply will be 
employed. On the contrary, when the rate is high, the 

* Those who borrow to consume unproductively produce the efifect, 
for the time, of diminishing the capital of the country, and of reducing 
the amount which can be offered by producers for labor. The greatest 
sinners in this respect are the governments who borrow enormous sums 
and consume them in wars and expenditures, from which no equivalent 
wealth is reproduced. It is said that, during the years 1870-1875, in 
England alone, loans were granted to foreign governments to the ex- 
traordinary sum of $1,300,000,000. (See Wallace, "Bad Times," p. 
18.) 

14 



1 86 DISlRIBUTION. 

use of capital in production is discouraged, and the rate 
will fall until all of the supply is loaned. Thus, capital 
can not be permanently loaned at rates much 
higher or lower than the returns to capital ac- 
tually engaged in production. 

173. This leads us at once to the crucial question of 
distribution. What principle determines the respective 
shares of labor and capital when engaged in production ? 

We have already seen that a supply of capital is neces- 
sary to every industrial operation as now carried on, and 
we have seen that labor is likewise necessary. They are 
as necessary to each other as the two blades of a scissors. 
Hence, of two things both essential, if one becomes abun- 
dant relatively to the other, that one must get a smaller 
return provided all of it is put into use, and the one 
which is relatively scarce will get a larger return. In 
brief, the proportional shares of labor and capital 
out of the product will depend upon the relative 
scarcity and abundance of labor and capital. Capi- 
tal, by its very definition (see section 35), must be em- 
ployed in production ; and capital can not be so employed 
without hiring labor. In order to ascertain the relative 
shares of laborer and capitalist, it is impossible not to com- 
pare the amount of capital offered for laborers with the 
number (and quality) of the laborers competing for the 
capital. If, for example, immigration, or the simple in- 
crease of population, should add greatly to the number of 
workingmen in the United States, without a corresponding 
addition to capital, then the share of the product which 
each laborer can demand will be somewhat less than be- 
fore. If capital, on the other hand, should increase more 
rapidly than laborers, the division of the product will be 
altered in favor of the laborer. This last seems to have 
happened in the past century in a marked manner. The 
invention of the steam-engine, the spinning-mule, the 
power-loom, and the vast increase in fixed capital, have 



INTEREST. 187 

made the accumulation of capital so great as to lower the 
rate of interest in all law.-abiding countries. The compe- 
tition of capitalists with one another, whenever a remunera- 
tive employment is disclosed, is far keener than the com- 
petition of laborers with one another for employment, 
great as that is ; and, when capital grows rapidly, the fall 
in the rate of interest is a natural result. In the United 
States in the last thirty years every one recognizes that 
the rate of interest (solely for the use of capital, not for 
its management) has been constantly declining. 

174* In Book I, Chapter V, we found that the supply 
of capital depended on (i) the amount which could be 
saved, and (2) on the disposition to save in the minds of 
persons in the community. But, as civilization makes the 
conditions of life and property more safe and stable, it is 
noticed that accumulations of capital do not neces- 
sarily diminish with the fall in the rate of interest. 
As the amount which can be saved may diminish, the de- 
sire to save may increase. In fact, when men save in 
order to secure an income on which to retire, a fall in the 
rate at which they can invest their savings will probably 
tend to induce further savings ; a larger capital is neces- 
sary to secure the desired income than when the rate was 
high. Yet, in general, it is probable that a fall in the rate 
will more or less affect the tendency to save capital. When 
the rate is high, men will strain a point in order to get all 
the capital they can save to invest ; but, when the rate is 
low, they will have a less incentive to cause them to un- 
dergo a great sacrifice. 

175* The supply of capital, however, is practically in- 
creased by any devices or means by which it is turned 
over more rapidly than before. These means have been 
increasing in a variety of ways of late years, and have had 
an important influence on the quantity of capital needed 
by a producer. The shortening of the period of manu- 
facture in an industry by the introduction of improved 



1 88 DISTRIBUTION. 

machinery is an example. If it formerly required ninety 
days, after buying materials, to make, finish, pack, sell, and 
get payment for a case of shoes, and if now it requires 
only thirty days for the same thing, it will be evident that 
the capital, by being turned over more rapidly, becomes 
three times as efficient ; or, what is the same thing, only 
one third as much capital is required for the same results 
as before. Any means by which the rapidity of circu- 
lation of the capital can be increased will have practi- 
cally the same effect as an increase in the supply of capi- 
tal. The introduction of the electric telegraph, of the tele- 
phone, and of rapid communication by steam, have had 
a great influence in this direction. In the old days it was 
required that capital should be invested for months in a 
cargo of wheat shipped from New York to Liverpool be- 
fore the payment was made. Now, without leaving the 
floor of the New York Produce Exchange, A may receive 
a telegraphic order from B, in London, to buy a cargo of 
wheat ; may purchase the wheat ; charter a vessel to carry 
it ; engage an elevator to load the vessel ; insure the cargo ; 
draw a bill of exchange on B for the amount of the pur- 
chase ; sell the bill, and get his money ; and send back 
word by cable of the transaction — all in a few minutes. 

176. We have now explained the principle according to 
which — if the value of the product is given — the respective 
shares of labor and capital are determined. This fur- 
nishes us with the principle governing the division ; but it 
does not explain why in some cases the rate of interest is 
high or low. It determines the proportional, not the ab- 
solute, amount. If the proportion set aside for interest 
remains exactly the same, the absolute amount of the 
interest will vary with the value of the product to 
be divided. To this point we have already referred (sec- 
tions 163 and 165). If capital gets one tenth of a large 
product, its share will be absolutely larger than when it 
gets one tenth of a small share. In short, the actual re- 



INTEREST. 189 

ward of capital in production at any time depends upon 
two things : (i) The abundance or scarcity of capital and 
labor relatively to each other, and (2) the value of the 
product to be divided. 

I77» In young countries, or in newly-settled districts, 
capital is not abundant ; neither is labor. Capitalists find 
it difficult to engage the necessary workmen, and yet the 
interest for capital is large. Why is this ? The abun- 
dance of fertile land and rich mineral resources give a large 
return to the application of labor and capital, and so the 
shares of both labor and capital are large. In 
Montana, and in the less settled portions of the United 
States, the rate of interest is yet (1887) as high as fifteen 
per cent.* In the North Atlantic States the rate is from 
four to seven per cent. And yet in the former districts 
wages are higher than in the latter. We should thereby 
understand that high interest does not imply low wages, 
but that both are large because the amount to be divided 
is large. From this some writers have tried to show that 
an increase of the product necessarily increases wages 
alone. We can see, however, that it increases both wages 
and interest. A greater proportion can go to wages only 
if the relations of labor and capital to each other are al- 
tered. In other words, if workmen become scarce rela- 
tively to capital, even in a new country of great natural 
resources, wages will rise beyond what was before consid- 
ered a high rate. 

178. It is well known that natural agents lie at the 
basis of all production : agriculture furnishes food and 
animal products ; mines give fuel, oil, and minerals ; for- 
ests yield lumber and materials for every trade. These 
are the main industries in a new country. When capital is 
first invested, the productiveness of industrial operations is 
so great that both high interest and large wages can be paid. 

* In many cases, however, the high rate is due to the element of 
risk, and in a new country this ought to be given full weight. 



1 90 



DISTRIBUTION. 



But these very industries are the ones which are most af* 
fected by the law of diminishing returns ; so that, as popu~ 
lation grows, and the natural resources are more and more 
worked, the yield to the same amount of capital and labor 
becomes less. Sooner or later the diminishing returns 
from natural agents will lower the sum to be divided be- 
tween capital and labor. So that, apart from the growing 
accumulations of capital by saving, capital, as well as 
labor, is likely to receive a less share, because the 
sum to be divided will become less. Improvements 
which offset the action of the law of diminishing returns 
will, of course, tend to keep interest from falling. But 
the accumulations of capital are steadily increasing, even 
though the natural agents of our country are being more 
and more taken up, and we need have little doubt as to 
the tendency of interest to fall. The share of the capi- 
talist is becoming less and less. This is a statement 
which may seem strange to some minds, but the truth of 
it may become more apparent when we have discussed the 
share of the manager of capital. 

179. The income on any investment, like the dividend 
on a stock, the interest on a bond or mortgage, or the rent 
of a farm, will govern the selling-price. About 1876 the 
United States Government sold $737,000,000 of bonds, 
which pay four per cent interest — that is, they could then 
borrow capital at four per cent. Since then the general 
rate of interest on equally safe securities has fallen to less 
than three per cent. As a consequence, the selling-price 
of a four-per-cent bond has risen far above par. The rea- 
son is plain. Such a bond yields. annually four dollars to 
its owner, and, if he is content with less than three per 
cent on his investment, he will be willing to pay more than 
one hundred dollars for such a bond ; he will pay so much 
more (say one hundred and twenty-seven dollars) that four 
dollars will be about three per cent on his purchase-price. 
If the income from bonds, land, or stocks remains steady, 



INTEREST. 191 

their selling-price will rise when the general rate of inter- 
est in the community falls ; and their selling-price will fall 
if the general rate of interest should rise. 

180. Exercises. — i. Distinguish between interest and 
the common use of the word "profits." If A puts capital 
into a business, and is excused from all work, and war- 
ranted against all business risks, what would you call his 
remuneration ? 

2. If A gave all his time and energies to the business, 
besides putting in capital, ought he to receive any more 
remuneration than in the first case } What would you call 
such extra remuneration ? Does he get it simply because 
he owns capital ? Could he get anything for the use of 
his capital without working.^ 

3. Why is it that a widow, who had a little fortune left 
to her, can get a higher rate by investments in railway 
stocks than in United States bonds ? Are railways always 
honestly and safely managed ? 

4. If people of many countries go to London to borrow 
capital, what effect would that have on the rate of interest 
in London ? If they go from other countries to England, 
what is probably the relative rate of interest in the coun- 
tries from which they come "i 

5. If strikers burn up warehouses or factories, do they 
lessen the capital by which they or other laborers can be 
employed ? 

6. Why are both wages and interest higher in the 
United States than in England or on the Continent.'* 

7. If great numbers of foreigners emigrate to the 
United States, how should that affect wages ? If capital, 
however, increases still faster than the workmen, would 
wages fall .-* 

8. Why should the. rate of interest on a Western farm 
mortgage be greater than on a mortgage on improved real 
estate in the midst of a great city ? 

9. If the rate of interest falls, does that mean that 



192 



DISTRIBUTION, 



capital can not find employment at all ? Will the rate 
have any effect on the demand for capital ? 

10. If a farm, always yielding $100 rent, sold for 
$1,000, when the general rate of interest was ten per cent, 
show that its selling price will be $2,000, if the general 
rate of interest falls to five per cent. 



CHAPTER XVIIL 

WAGES. 

l8l. Before going further, it will be well to define the 
various meanings associated with the word wages. The 
distinction between money wages and real wages is highly 
important. By Real Wages is meant the amount of 
commodities of value received by a laborer for his 
exertion,* either physical or mental. It is in this sense 
that wages vitally concern the laborer. Adam Smith says : 
" The real wages of labor may be said to consist in the 
quantity of the necessaries and conveniences of life that are 
given for it ; its nominal wages in the quantity of money. 
. , . The laborer is rich or poor, is well or ill rewarded, in 
proportion to the real, not to the nominal, wages of his 
labor." By nominal, or Money, Wages is meant the 
amount of money a laborer receives for his exer- 
tion. People who think only of the money they receive 
forget that the money buys sometimes more, sometimes 
less ; they overlook the fact that an increase of Money 
Wages, when prices have risen, does not increase real wages. 
During our civil war prices in depreciated paper rose enor- 
mously, and wages in paper money were higher than in 
the days of a gold currency; and many persons were igno- 
rant enough to think they were better off simply because 

* Real Wages do not comprise merely the necessaries of life, as 
some erroneously think. Real Wages may include comforts and even 
luxuries, if wages are high enough. 

(193) 



194 



DISTRIBUTION. 



they received more dollars per week, no matter whether or 
not those dollars bought as much as their former gold 
wages. The question of real importance to the working- 
man is the quantity of commodities he gets for his work.* 

182. Closely connected with Real Wages is the idea 
expressed by the term standard of living of a class of 
laborers. Having become habituated to a certain kind of 
living, a certain quality and quantity of food, clothing, and 
comforts, laborers may be so strongly desirous of keeping 
this standard that rather than forego any of their satisfac- 
tions they will limit the increase of their numbers. This 
may be done through fewer births, or by emigration. Per- 
sons who want a higher standard of living than they can 
get in Germany, Italy, and Scandinavia, are constantly 
emigrating to the United States, where they can secure a 
greater remuneration for their labor and a higher standard. 
In France, rather than submit to a lower standard of liv- 
ing, the small farmers limit the size of their families. 

It can not be said, however, that the standard of living 
is a fixed and invariable thing. It is much more easily 
lowered than raised, although there can be no question 
that in Europe and the United States during the last fifty 
years it has been slowly raised. Workingmen have more 
commodities which yield satisfactions now than at the 
beginning of the century. Machinery has cheapened many 
articles of common use so that they are within the reach 
even of the poor. The humblest cottage now contains 
articles which a few hundred years ago were beyond the 
reach of nobles in their princely castles. 

183. It is now necessary to state the principle govern- 
ing the general sum paid as wages. Although this 

* In case a man is paid by the piece, his wages are high or low ac- 
cording to his dexterity and skill. But the total payment for his day's 
work, although estimated as so much money, is still to be really tested 
by the quantity of desirable things which he can command as the result 
of his work, not merely by the money he gets. 



WAGES. 



195 




INTEREST 
INSURANCE 



has already been given (section 173) in discussing inter- 
est, or the share of capital, a further statement is desirable. 

After setting aside from the total product to be divided 
the sums paid for taxes and rent, the 
problem was to ascertain the point of 
division of the remainder of the prod- 
uct, expressed by A B in the accompa- 
nying diagram, into wages and interest. 
This point of division is fixed by the Iwaqes 

relative abundance or scarcity of 
labor and capital. This is the prin- 
ciple of which we were in search. It is 
to be observed, however, that this does 
not tell us what governs the rate of wages q 
for a class of laborers, or for any indi- B 
vidual laborer; it tells us only how the 
total sum which goes to labor is fixed, regardless of 
the different kinds and conditions of labor. We shall de- 
fer to the next chapter the explanation of the principles 
by which the total sum, A D, is distributed among the 
various classes of laborers. 

184. The payments for taxes, insurance, etc., are ne- 
cessary in order that both capital and labor can continue 
their joint operations. The important point is as to the 
relative shares which capital and labor get out of 
the remaining product. If one becomes relatively less 
abundant, it can hold back, and the other must come to 
it, for the other can do nothing alone in production. If 
one of the two is anxious to make an agreement, it is 
only because its relative position is such as to create this 
anxiety for its employment. To illustrate this, suppose 
the number of workmen competing for employment in 
the United States were greatly increased by the arrival of 
Hungarians and Italians (who work for very low wages), 
and, also, let us suppose that capital is no greater than it 
was before the arrival of these laborers — it will be evident 



196 



DISTRIBUTION. 



that capital has the relative advantage, and labor the rela- 
tive disadvantage, when they begin to enter into an agree- 
ment to work together. Each of the increased number of 
laborers will not now receive the same amount as was be- 
fore given to each of a smaller number. There are no 
more shops or factories than before, no more employment 
offered ; for no more capital exists than before, though 
there are more laborers competing for the same opportu- 
nities of employment. In such a case, laborers, by their 
own competition, will agree to work for a less sum per day 
than before their numbers were increased. The result of 
this is to increase the share of capital, D C, relatively to 
that of labor, A D, if all the laborers are to be employed 
by the existing capital. 

185. Some one may say, by way of objection, that if 
there are more laborers ready to work they will bring 
with them more hands, and they will thus produce more 
wealth in direct proportion to their increased numbers. 
This, however, can not be true ; and it brings us to under- 
stand how intimately production and consequently wages 
depend upon capital. Suppose that the area of circle A 

represents a 
given capi- 
tal, employ- 
ing a given 
number of 
laborers, re- 
sulting in 
a certain 
amount of 

wealth, represented by the area of circle B. Now suppose 
that there is a considerable increase of laborers competing 
for work, but that there is no increase of capital. If there 
is no more capital than before, there are no more factories, 
railways, docks, no more tools, machinery, no more materi- 
als and food to be used productively by the additional la- 





WAGES. 



197 



borers. The increased number of workmen will therefore 
have only the same instruments and materials of produc- 
tion as before. Two carpenters with one hammer can not 
drive as many nails as they could if each had a hammer. 
Since capital is necessary to production, we can not in- 
crease the production of wealth simply by in- 
creasing laborers. It is conceivable that more laborers 
might use the existing capital more effectively, and thus 
perceptibly increase the wealth from B to B'. That is, 
two men with one hammer, by relieving each other, might 
drive more nails in a day than one man alone with one 
hammer. But to suppose that doubling the laborers with- 
out increasing the capital will double the wealth produced 
is seen to be absurd as soon as we realize what capital 
means. The production of wealth, not having been in- 
creased in proportion to the increase of the laborers, the 
sum to be divided among them can not be increased in 
the same proportion, and there can not be enough to give 
the former wages to each of the new-comers.* 

186. If, on the other hand (taking a supposition the 
reverse of that in section 185), saving is going on rapidly, 
if business is prosperous and '' profits " are high, then cap- 
ital will be accumulated with great rapidity. Or, if the 
Government is paying off its public debt rapidly, that will 
add to the capital seeking investment. Should the growth 
of capital exceed the increase of the population seeking 
work, there would be an increased number of opportuni- 
ties offered to men for employment. There would be 
more men wanted in already-established mills ; new fac- 
tories, new mines, new railways, and new enterprises would 
start up, because the increased capital would be seeking 

* I have taken the case of ordinary manufactured goods as most 
favorable to objectors ; but, had I considered commodities affected by 
the law of diminishing returns, it would need no explanation to show 
that additional labor would not insure a proportional increase of prod- 
uct, even if capital had increased. 



198 



DISTRIBUTION. 



investment, and thus more superintendents, more laborers, 
and more artisans of every kind would be wanted. The 
demand for labor would be stronger than before. Labor 
would be at a relative advantage and capital at a relative 
disadvantage if all of both are to be employed, and labor 
could drive a better bargain than before. In such a case 
the share of labor (A D) relatively to that of capital (D C) 
would be increased. 

187. We can now make some modification of our gen- 
eral statement as to wages. The productiveness of a 
country's industries determines whether the gen- 
eral level of the wages shall be high or low. But 
about this general level (see the movement of the 
curved lines in the figure of section 165) the amount of 
wages will fluctuate ; since the demand for labor, 
compared with its supply, will determine in fact 
what the employers will promise to pay, and what 
the employed will agree to receive. To illustrate : 
The industries of the United States are at present more 
productive than those of France^ and consequently the 
general level of wages is higher in the United States than 
in France. But a variation in the demand for labor, rela- 
tively to its supply, is constantly going on ; and so the 
general rate of wages may rise or fall above or below the 
high level fixed merely by the productiveness of our in- 
dustries. If capital increases more rapidly in the Unit- 
ed States than the number of our workmen, the cap- 
italist, in order to invest, will necessarily promise to pay 
out of the total value of his product a relatively greater 
share to labor in wages. If, on the other hand, capitalists 
lose confidence, if they are timid and shrink from invest- 
ment (as in times of depression in trade), and laborers 
continue to increase as in prosperous times, the latter, of 
course, in order to get employment, will agree to work for 
less wages than before. Both capital and labor are essen- 
tial to production ; each requires the other. No matter 



WAGES. 



199 



what the conditions of productiveness are, if either is 
eager for the other, because of stress of competition (on 
one side or the other, either of laborers against laborers 
or of capital against capital), that one will get the poorer 
bargain. 

188. Labor unions have grasped this principle when- 
ever they have limited their membership, and then by 
various means made it impossible for any other than one of 
their own members to get work. They thus shorten the 
supply of labor in their trade relatively to the demand for 
it, thereby raising wages at the expense of other laborers 
who are kept from competing with them. So far as such 
restrictions on numbers affect only one trade, it is at the 
expense of some other workmen ; but, were the idea gen- 
erally followed out, and had the poorest class of workmen 
smaller families, making fewer additions to the ranks of 
competitors in that poorest class, they could better their 
condition as a whole. Labor organizations of the 
present day try to collect all workmen into one associa- 
tion, and from this coigne of vantage to better their posi- 
tion as receivers of wages relatively to the capitalists. 
Theoretically, this may work well for laborers ; but, when 
they strike to enforce their demands for higher wages, the 
employers have so far seldom failed to find a sufficient 
number of other laborers ("scabs," so called) ready to 
take the place of the strikers. Usually the efforts of the 
strikers have been directed against the *^ scabs," who, by 
intimidation and riots, are sometimes driven from work. 
Here, again, unless numbers in general are lessened rela- 
tively to the demand for them, the strikers gain at the 
expense of other workmen. 

189. The same principle that we have been discussing 
affects the wages of one trade relatively to the 
wages of other trades. In the United States, for 
example, we often see the iron industry stimulated by a 
good demand for iron ; and the trade is then said to be 



200 DISTRIBUTION. 

prosperous. Under the new demand the price rises ; or, 
in other words, the producers of other things who want 
iron are obliged to give more of their wealth than before 
for the same amount of iron. The producers of iron re- 
ceive a larger share than before of the wealth of the coun- 
try, and have more to divide as wages and interest. In 
this way the wages of one industry m'ay become higher 
than the wages of other industries. Whether they will 
remain higher depends on whether workmen from other 
trades are competent to come in and compete with those 
already employed (that is, if there is " free competition "). 
We have before noticed (section 84) that the proper 
adjustment of production in a community is exceedingly 
intricate. Each industry is seeking a market ; that is, 
each industry depends on the demand of other producers 
for its own goods, and what every merchant or " business 
man " is doing is to discover practically the mere facts as 
to the desires of other producers for his goods. Hence 
it is natural that in the complexity of exchanges between 
all trades, producers should sometimes make miscalcula- 
tions as to the facts ; and so there are periods when more 
of one class of goods is produced than is wanted, and 
other periods, again, when there are not enough of certain 
products to satisfy the demand. In the first case, prices 
fall, and wages are lowered ; in the second case, prices 
rise, and wages can be raised. So we see that the vary- 
ing movements of demand and supply between 
different trades will affect the relative rates of 
wages.* We shall have occasion to refer to this again in 
considering the wages of particular employments. 

* " The recent advance in England's wealth has caused a great 
demand for building ; and those who produce other things have had 
to give more of them than before for the purchase or hire of a house. 
There has been an increased competition for the aid of the building 
trades, which has raised their wages and enabled them to obtain a 
larger share of the wealth of the country than before. Now suppose 



WAGES, 20I 

190. It should be clearly understood here that, in 
speaking of the shares which go to labor and capital re- 
spectively, we consider the share of capital solely as inter- 
est (together with insurance for risk), and that we do not 
include as the reward for the possession of capital the 
wages which a capitalist or manager receives for his time 
and ability, and which is usually included under the term 
" profits." With this understanding, the " conflict between 
labor and capital " assumes a different phase. As we have 
seen (section 178), interest, the share of capital, is 
decreasing. The whole tendency of civilization works 
to strengthen the providence of mankind, to create greater 
security for life and property, and so to increase the desire 
to save. The growth of capital is now going on in the 
United States at a rate which far outstrips the growth of 
numbers; and the rate of interest, or the sum which any 
employer need pay for the use of capital in his business, 
is steadily diminishing. The rate of Money Wages, on the 
other hand, is rising, and also many articles of common 
consumption have been lowered in price, so that Real Wages 
have risen still more. So long as these facts exist, it can 
hardly be said that the " conflict " between the laborer 
and the capitalist is going against the laborer. In fact, 
the real difficulty with the labor question is not at this 
point. Later we shall see that in reality it is a contest 
between different classes of laborers (considering 
all managers as laborers who receive large wages for con- 
ducting their business). 

that during such a rise in the price of houses there is a sudden check 
to the supply of (say) house-carpenters. The rest of the building 
trades will then find it difficult to obtain the aid of carpenters to sup- 
ply roofs, floors, etc. And since the work of masons, plasterers, and 
master-builders will be of little use without such aid from the carpenters, 
the competition of the other building trades for the aid of carpenters 
will force up the wages of carpenters, and enable them to obtain an 
exceptionally large share of the earnings-and-interest fund." — Marshall, 
** Economics of Industry," pp. 128 and 129. 
15 



202 DISTRIBUTION. 

191. Exercises. — i. M received as Money Wages 
%2 a day in gold. Prices then rose 100 per cent, or were 
exactly doubled. M's wages then rose to $3 a day. How 
much had his Real Wages changed ? 

2. Would you say that the Chinese had a different 
standard of living from that of native American laborers ? 
Do they expect the same quantity and quality of food, 
clothing, shelter, amusements, and comforts .? 

3. Can laborers, by strikes and combinations, raise 
their wages to a point where nothing is left for capital as 
interest } Why not ? 

4. If, in a small town where one blacksmith had done 
the work, nine more blacksmiths set up forges, would that 
affect the wages of blacksmiths ? Why ? They could do 
more work than one, and why could they not all get good 
wages provided they were industrious ? 

5. Why is it that, when "times are good," and busi- 
ness is profitable, we see few laborers out of employ- 
ment ? 

6. In our western territories both the land is highly 
productive and laborers are scarce. What would you con- 
clude as to the rate of wages there ? Would they be high 
or low ? Why ? 

7. How can you account for the fact that wages are 
higher in England than in Germany and France ? Why 
are wages higher in the United States than in England ? 
Is our land more productive than in England for the same 
application of labor and capital ? 

8. When labor unions shoot and pelt other laborers 
who are working in the place of strikers, do they injure 
their employers ? If they burn the buildings and property 
of employers, will there be as much as before with which 
to employ labor ? 

9. When our civil war broke out, there was a great de- 
mand for woolen blankets and clothing for the army. How 
could that have affected wages in the woolen industry 



WAGES. 



203 



relatively to industries which did not feel such a stimu- 
lus ? 

10. Why is the rate of interest decreasing ? Does that 
mean that employers who superintend their own business 
are getting decreasing shares ? If interest falls, does that 
imply a fall of the manager's tvages ? 



CHAPTER XIX. 

WAGES OF DIFFERENT CLASSES OF LABORERS. 

192. Having discussed the principles which govern 
the general share of labor in the product, and in one trade 
relatively to another, we now continue this discussion by 
trying to find how the total share of labor is divided among 
the various classes of laborers. If, for example, the gen- 
eral level of wages is high in the United States, we want 
to know why some laborers have higher or lower wages 
on this general level than others. We shall thus carry the 
question from the point of its application to laborers as a 
whole to that of classes of individual laborers. Referring 
to our figure (in section 183), it is our purpose to decide 
how the sum represented by A D, or wages, is divided 
among the various classes of laborers. So far as 
the individual laborer is concerned in bettering his position, 
this is to him really the important question in the dis- 
tribution of the product ; for we shall soon see why, out 
of this sum, A D, one laborer receives a higher share than 
another. 

193. The members of the industrial world resolve them- 
selves into groups, or different layers, one above another, 
with more or less defined limits. Mr. Mill spoke of the 
grades of labor in England as divided into about four * 

* " The divisions between the various grades of English society are 
not so clearly marked in this generation as they were in the last. Each 
of Mill's four grades is subdivided into a number of lesser grades, ris= 

^204) 



WAGES OF CLASSES OF LABORORS. 205 

classes, with a line of demarkation so strongly drawn as to 
be almost equivalent to a hereditary distinction of caste — 
the liberal professions, the more highly skilled artisans and 
tradesmen, the lower classes of skilled laborers, and, lastly, 
unskilled laborers. In the United States the lines of de- 
markation are far less distinct, and, from the common un- 
skilled day-laborer who works with pick and shovel to the 
most highly successful '' captain of industry," the various 
industrial groups shade into one another imper- 
ceptibly. Yet there is a marked separation into the un- 
skilled laborer ; the little skilled and slightly educated (these 
two classes are largely composed of foreigners) ; the skilled 
mechanic, the overseer and accountant ; the chemists, en- 
gineers, and members of the liberal professions ; and the suc- 
cessful managers, or entrepreneurs. As we look into a great 
factory of the present day, we shall find men engaged in cart- 
ing and lifting, which requires no skill or training ; others 
stand by feeding machines in a purely mechanical manner, 
without the least knowledge of the machine ; others per- 
form marvelous feats of dexterity ; others are pointed out 
as most skillful molders, or glass-blowers, or furnace-men ; 
or there is the superintendent of the carding-room, or the 
weaving-room, or the bleaching and dyeing; others in a 
laboratory are testing metals, experimenting scientifically on 
materials, oils, and machinery, working out better processes 
for the industry ; and, finally, at the head of all, the cause 
of its existence, the director of the whole establishment, a 
financier as well as a practical manager, watching all de- 
tails, and yet keeping an eye on the broad extent of his 
market, buying materials and selling his product to the best 
advantage, the most skillful laborer, and the worker most 
necessary of all to the permanence of the establishment. 
194. There is a great difference, however, as to the 

ing one above the other like the steps of a long staircase that is ar- 
ranged in four flights, with a short landing at the end of each of them." 
— Marshall, ibid., p. 108. 



2o6 DISTRIBUTION. 

numbers in each group or layer. The supply of unskilled 
laborers is, as every one knows, vastly greater than highly 
skilled artisans (such as good machinists), while the num- 
ber of successful business managers is, relatively to the 
number of other classes of laborers, very small. There is 
a false idea current which prompts us to separate the man- 
ager of a business from the men he employs, and not to 
call him a laborer, which he unquestionably is, as if labor 
were not honorable. As well say that pleasure-yachts 
should not be classed as sailing-vessels, because their sails 
are used for different purposes than carrying merchandise. 
Taking a general view of all the different classes of labor- 
ers, the most striking fact to be noticed, then, is the large 
numbers in those groups lowest down in the scale 
relatively to those higher up. This can be best rep- 
resented by the accompanying figure, in which the un- 
skilled laborers. A, 
form the largest layer 
at the bottom of 
the industrial world. 
The class who have 
attained some slight 
education, can prob- 
ably write and use 
figures, and have 
some acquired skill, will be less in number, like B. In 
C will be found the skilled artisans ; in D the engineers, 
chemists, superintendents, and professional men ; while E 
will then be composed of a small number of competent in- 
dustrial managers. This shows how our classes of labor- 
ers are divided, forming as it were an industrial ladder 
from the lowest place to the highest, up which any man 
can go who has ability, character, industry, and ambition. 
195. The whole sum, A D (in the figure of section 183), 
which goes to wages, is divided among the different classes 
of laborers, from A to E. In any great factory you will 




WAGES OF CLASSES OF LABORERS. 207 

see all kinds of labor employed, from the lowest to the 
highest. What is the principle of distribution between 
these various kinds of labor? Simply, the supply of 
any one kind of labor relatively to the demand for 
it. Let us consider first the supply of unskilled la- 
bor, and then the demand for it. 

To this class of laborers are especially applicable the 
principles enunciated in the Law of Population in Chapter 
IV. The tendency of numbers to increase faster than 
subsistence has its strongest bearing on the least intelli- 
gent, most improvident, and most unprogressive portion of 
the community. They do not seem to be able to look 
forward with such distinctness as to value a future gain 
sufficiently to repress a present gratification. Because 
they are ignorant, they thoughtlessly add to the size of 
their families without heeding the question as to where 
employment is to come from. It is generally found that 
in the lowest group extreme poverty and wretchedness de- 
stroy all motives to better their condition, and thus these 
persons are the very ones to increase in numbers faster than 
classes far above them in character and intelligence. It 
would be far better for the human race were the best stock 
to increase faster than the poorest. The class of common 
unskilled laborers are governed more by feelings, customs, 
and traditions than by judgment and reason. They get 
stolidly accustomed to a certain kind of existence, and 
rarely care for anything better. A most promising sign 
would be dissatisfaction with their condition (accompa- 
nied with some understanding as to the means of bettering 
it). When, for any reason, wages rise, and this kind of la- 
borer gets the means of living more comfortably, the re- 
sult generally is an increase of numbers, so that the greater 
number can live at nearly the old level, instead of the for- 
mer number rising to a really higher level. Increased 
wages will almost invariably result in increasing the sup- 
ply of unskilled labor. If, on the other hand, wages fall, 



2o8 DISTRIBUTION. 

numbers are lessened by the sad effects of want, of dis- 
ease, and often of crime ; or at least the growth of num- 
bers is checked. Anything which affects the opinions and 
habits of this class, and raises the standard of living,* 
causes their children to become healthier, better educated, 
and more efficient workmen in the next generation. Al- 
though the standard of living varies in different countries, 
and at different times in the same country or place, yet 
the tendency is for population to accommodate 
its numbers to this standard. Where the standard is 
very low, there is little provident control over an increase 
of numbers. Brought up in a single room, with unwhole- 
some air, poor food, and accustomed to dirt, evil, and vice, 
it will require a considerable wrench for many to think 
that similar things are not good enough for them when 
they grow up. There is, therefore, very little check upon 
the supply of unskilled labor because of any real consid- 
eration as to the actual or probable demand for it. 

196. When we come to consider the demand for 
unskilled labor, it will be found that it is not such as to 
give high wages to the large supply of laborers of this 
class. Some unskilled labor is needed, in varying pro- 
portions, of course, in almost every kind of enterprise. 
The railway needs the laborer with his barrow and shovel, 
or as brakeman ; the builder requires the hodman ; the 
factory, the carter, the porter, or watchman ; and a multi- 
tude of small offices in society demand the labor of un- 

* " Experience shows that, in the existing state of society, the press- 
ure of population on subsistence, which is the principal cause of low 
wages, though a great is not an increasing evil ; on the contrary, the 
progress of all that is called civilization has a tendency to diminish it, 
partly by the more rapid increase of the means of employing and main- 
taining labor, partly by the increased facilities opened to labor for 
transporting itself to new countries and unoccupied fields of employ- 
ment, and partly by a general improvement in the intelligence and 
prudence of the population." — J. S. Mill, " Chapters on Socialism," 
" Fortnightly Review," 1879. 



WAGES OF CLASSES OF LABORERS. 209 

skilled workmen. But the advance of inventions, knowl- 
edge, and skill make it impossible that production in 
general should go on without at the same time the aid of 
higher groups of labor. The unskilled labor forms but a 
part of the labor needed. In producing articles which 
satisfy people's wants (and find a "market"), the greater 
the general means of production in actual employment, 
or the greater the amount of capital ready to furnish 
materials and aid to labor, the greater the chances are 
that more unskilled labor will be wanted. Even skilled 
labor will require the co-operation of some unskilled 
labor ; the plasterer needs his tender, the bricklayer his 
hodman. But the supply of unskilled labor rela- 
tively to the demand for it is out of all propor- 
tion to the supply of skilled labor relatively to 
the demand for it. Consequently, disagreeable work, 
provided it requires no skill, is not paid a high price. As 
Mr. Mill says : * " The really exhausting and the really re- 
pulsive labors, instead of being better paid than others, 
are almost invariably paid the worst of all, because per- 
formed by those who have no choice. If the laborers, in 
the aggregate, instead of exceeding, fell short of the 
amount of employment, work which was generally dis- 
liked would not be undertaken, except for more than or- 
dinary wages. But, when the supply of labor so far ex- 
ceeds the demand that to find employment at all is an un- 
certainty, and to be offered it on any terms a favor, the 
case is totally the reverse." If anything should occur in 
society to increase the demand for unskilled labor rela- 
tively to skilled, it would give the former a larger share of 
the product than before as wages. But it would probably 
not be permanent ; for mere birth, mere existence, creates 
an unskilled laborer, while training and capacity stand as 
barriers to protect the skilled laborers from the competi- 
tion of those below them ; and this barrier keeps out an 

* " Principles of Political Economy," Book II, chap, xiv, § i. 



2IO DISTRIBUTION. 

unfortunately large number from the class of skilled la- 
borers. 

197. Not merely the expense required in getting edu- 
cational advantages and mechanical training, or the loss of 
time involved in trying for better qualifications, but the 
moral energy necessary to overcome mental difficulties, 
the determination, character, industry, ability, and ambi- 
tion implied in making the attempt to rise from one class 
to another, give those who succeed in doing so a position 
in the nature of a monopoly. They are fewer in num- 
ber than those below them, because the qualities required 
for rising are not possessed by every one. The advantage 
of being in a privileged class, for natural and intrinsic rea- 
sons, is that they are shut off from the competition 
of the larger number who are not skilled ; and, as their 
numbers are smaller in proportion to the demands made 
upon them by productive operations, they receive higher 
wages than their more numerous brethren below them. The 
only true remedy, therefore, for low wages of unskilled 
labor, if not simply a restriction of numbers relatively to 
the demand, is a persistent and intelligent effort to raise 
their condition by means of Christian teaching, which 
gives the true value of self-sacrifice and the proper esti- 
mate of the future over the present (which affects the ac- 
cumulation of capital and the size of families) ; the better 
training of those classes by industrial schools ; and, in fact, 
by everything which makes for character and greater pro- 
ductive capacity. The improvement of the lowest of the 
laboring- classes is simply the question of improving man- 
kind. It is not a thing to be accomplished in a day or a, 
year, and it needs all the forces of Christian civilization. 
It will not be accomplished at once by any nostrums, or 
by an appeal to the State. Legislation is not a remedy 
for low wages ; for the question which really concerns the 
workingman resolves itself into a division between differ- 
ent classes of laborers ; and those most in demand, and 



WAGES OF CLASSES OF LABORERS. 211 

who at the same time are relatively fewest in number, will 
get the largest share, whatever legislators may enact. 

198. We must by this time understand that there are 
classes of laborers, separated by distinct lines of division, 
within which there is free competition, but between which 
there is little or no competition. A teamster for a flour- 
mill may easily transfer himself as a teamster to a rolling- 
mill ; but he can not compete with a wheelwright who 
arranges the machinery of a flour-mill. A laborer may 
move about in different industries (with some exceptions) 
on his own level, but he does not compete freely with 
those above him in his own industry. There is not, in 
fact, free competition of labor with labor ; and so we find 
a number of non-COmpeting groups, or classes. Geo- 
graphical distance, different language, customs, religion, 
and political ideas also tend to prevent those on the same 
level from competing freely with one another. So that, 
whenever (as mentioned in section 189) the products of 
one industry, or those in one place, are in greater demand 
than those of other industries or places, it may readily 
happen that wages may be higher in the former than in the 
latter ; and, so long as these higher wages are not lowered 
by competition with other laborers (on the same level, or 
because of being on different levels), wages will continue 
to be higher in the former than in the latter. W"ages 
in non-competing groups may consequently be on 
different scales, even where the sacrifice and ex- 
ertion of the laborer is the same ; that is, wages 
may thus be disproportionate to sacrifice. But, so fast as 
the' spread of knowledge and greater enterprise give the 
laboring class more mobility, the less will this hold true. 
Like capital, labor is every day becoming more cosmo- 
politan. 

199. When we come to consider skilled laborers, we 
see at once that there are several influences which act to 
limit the supply of them, influences, loo, which work with 



212 DISTRIBUTION. 

greater force the higher up we go in the various groups, 
(i) First, we find that to secure the training of such a 
one, an outlay of capital is essential, even though he 
may hope for higher wages in the future as a consequence 
of this expenditure. This requires a sacrifice of present 
enjoyments for the purpose of gaining an indefinite future 
gain, which has no substantial influence on the common- 
place mind. It tends to keep many a sluggish tempera- 
ment confined to the condition of life in which he was 
born. A man educated at considerable expense for a 
calling which requires skill and dexterity, however, should 
expect that his wages would be at least increased by a 
sum equal to the interest on the capital expended. But 
it will be found that it will be something more than this, 
because the mere existence of a barrier to be overcome 
keeps out many who could cross it, and so creates a par- 
tial monopoly for those who are on the fortunate side.* 
Wages of the higher industrial orders will exceed the 
wages of those below them by more than the mere interest 
on the quantity of capital necessary to acquire the de- 
sired instruction. (2) For in many cases the parent, or 
laborer himself, may fully appreciate the advantages of 

* " A poor and ignorant parent is not likely to think of obtaining 
for his son a lot in life very different from his own. A man brought 
up with narrow surroundings is apt to acquiesce in them. His own 
start in life was a poor one, and it seems to him quite reasonable that 
he should make what he can out of the labor of his son ; his wages 
almost imply that the world expects him to do it, and his neighbors 
do it ; so he allows a small present gain to himself to outweigh a great 
future advantage for his son. The poor are moved as much as any 
other parents by the sight of the sufferings of their children, but they 
are careless about the distant future, both of their children and of 
themselves, for they have not a vivid imagination — they are ruled by 
custom, and not by the deliberate use of their reason. The lower we 
go in the social scale the less do parents seem to see the benefits that 
they may confer on their sons by investing trouble and money in their 
education, and the smaller is their power of making such sacrifices." — 
Marshall, "Economics of Industry," pp. 106 and 107. 



WAGES OF CLASSES OF LABORERS. 



213 



thus using his capital, but may find it very difficult to 
borrow or save a very large sum. This difficulty, to be 
sure, is not so great in States where children have access 
to free public schools of a high grade, with the occasional 
addition of good, free scientific and industrial training. 
Again (3), the number of persons who can profit by edu- 
cation and training, who are fitted mentally, morally, 
and physically for higher occupations is not equal to the 
number of those who make the attempt. Honesty, for 
example, is not universal, and an employe of known and 
proved honesty in a bank, or diamond-store, receives 
high wages simply because his qualities are so rare as to 
command a monopoly price. So with an expert account- 
ant, an expert assorter of wool, a successful dentist, or a 
shrewd and skillful lawyer. Not every man in these oc- 
cupations can stand at the top, and some should not be 
in them at all. On the other hand (4), some occupations, 
like those of the blacksmith, set a premium on large 
and strong men, and are avoided by those who are 
physically weak. 

200. The demand for skilled labor depends more 
or less upon the nature of a country's industries, and upon 
the state of the arts, (i) In manufactures, the knowledge 
of the arts, the control over physical laws, as shown 
by more or less improved machinery, and the processes 
of treating materials, largely determines the number of 
skilled laborers in a particular kind of employment. For 
instance, at a given time, with a given knowledge of the 
arts, the demand for skilled labor in the manufacture of 
cotton is a definite thing; but if a revolution comes, by 
reason of some discovery in the processes of weaving or 
dyeing, it may change the demand for skilled labor in that 
industry relatively to the demand for unskilled labor. (2) 
If there are industries, like glass-blowing, in which trained 
laborers are largely employed, and then if there comes an 
increasing demand from other industries for the products 



214 



DISTRIBUTION, 



of the glass-blowers, that will have the effect of increasing 
the wages of these skilled laborers. If this were general, 
all skilled laborers would be the gainers. But, as a mat- 
ter of fact, skilled and unskilled laborers are most com- 
monly at work in the same industry ; and the real cause 
of higher wages for the skilled is due to their possession 
of a natural monopoly in qualities which the many lack. 
There can be scarcely any enterprise undertaken which 
does not create a demand for skilled labor ; so that (3) the 
general increase of capital, its increased investment 
in railways, factories, houses, etc., will necessarily in- 
crease the demand for skilled labor. As civilization pro- 
gresses, also (4), the desires of society multiply. People 
begin to set a high value on things of a less material char- 
acter — pictures, musical instruments, etc., are wanted. 
Hence, as a country grows in wealth and has a wider 
range of ideas, it is likely that there will be a greater de- 
mand, other things being equal, for those articles for whose 
creation skilled labor is essential. 

201. Thus we see that an increase, in the demand 
for skilled labor, by reason of a change in our knowledge 
of the arts, or the increasing investments of capital, or the 
widening desire for articles requiring skilled labor, will 
alter the rate of wages in its favor. Moreover, the 
supply of such labor does not readily, or even in a long 
time, increase because of the existence of any new de- 
mand ; for the barriers which protect the skilled 
laborer from the competition of those below him 
practically limits the numbers of his class. It is 
this restriction upon numbers, owing largely to 
natural causes, that has the chief influence in 
raising the wages of skilled above those of un- 
skilled labor.* Were the lower strata in the labor- 

* " There is a natural monopoly in favor of skilled laborers against 
the unskilled, which makes the difference of reward exceed, sometimes 
in a manifold proportion, what is sufficient merely to equalize their 



WAGES OF CLASSES OF LABORERS. 



215 



ing class to become as skilled as those above them, then 
skilled labor would command relatively less wages than 
it does now. If class A became as skillful as class B, 
there would be free competition between all members of 
both classes, and the wages of all would be alike. So, 
also, if the supposition were extended to the farthest ex- 
treme (a quite impossible supposition), and if it were true 
that all laborers in A, B, C, D, E were equally skilled, 
then those in E could expect no higher wages than those 
in A, for there would be no different classes. The tri- 
angle in our figure, 

with its layers grow- /e\ 

ing smaller toward / \ 

the top, would dis- / ^ \ 

appear, and all 
would be thrown to- 
gether in a common 
field like X Y, where 
each is on equal l 
terms with every 

one else. There would be no non-competing groups 
but only such as are created by distance, language, cus- 
toms, institutions, etc., founded on differences in skill ; 
but differences do exist, and probably always will exist, 
in natural and acquired aptitudes. We all know that dis- 
tinct classes of skilled labor exist ; and while this is the 
case their wages will be higher, because, while they are 
as necessary to production as unskilled laborers, skilled 
laborers do not increase in numbers in the same propor- 
tion. 

advantages. But the fact that a course of instruction is required, ol 
even a low degree of costliness, or that the laborer must be maintained 
for a considerable time from other sources, suffices everywhere to ex- 
clude the great body of the laboring people from the possibility of any 
such competition." — J. S. Mill, " Principles of Political Economy," 
Book II, chap, xiv, § 2. 



2l6 DISTRIBUTION. 

202. On the other hand, for the very reason that skilled 
labor requires some previous expenditure of time, money, 
patience, and industry, any unforeseen withdrawal of 
demand for it, as in particular industries, may be quite 
serious. If the acquired skill is such that it can not be 
easily transferred to other occupations, the forced change 
to some other employment involves the loss of all special 
training. For example, if the demand for glass were to 
fall off suddenly, skilled glass-blowers would be quite un- 
able to make use of their skill in swinging and blowing the 
pipe were they forced to seek some other occupation, such 
as shoe-making. They, therefore, have a large self-inter- 
est in the continuation of the industry ; and in such em- 
ployments it ought to be easy for the manager and em- 
ployes to see that their interests are closely bound together. 

The introduction of machinery, however, has lessened 
this general difficulty. The ability to feed and manage 
one kind of machine is such that it is easily possible to 
learn how to manage another kind. A few years ago the 
operative in a shoe-factory was of necessity something of 
a shoemaker ; now, owing to the use of marvelously well- 
adapted machinery, he need know nothing whatever be- 
yond the easily acquired knack of managing and working 
his particular machine. It would not be difficult now for 
a man to pass from the shoe to the cotton or woolen indus- 
try, or^ indeed, to many others. 

203. There are, however, some considerations affecting 
the wages of laborers in different employments, which have 
not yet been touched upon. If one trade, requiring labor 
of the same skill as another, offers inducements in the way 
of adventure, healthy or attractive climate, clean 
instead of dirty work, personal honor or social po- 
sition, constant employment, or certainty of suc- 
cess, wages will be less in that trade than in another in 
which the conditions are the reverse. A soldier's or a 
sailor's life is dangerous, and often implies hardship and 



WAGES OF CLASSES OF LABORERS. 217 

great exposure ; but, owing to the attractions of a life of 
adventure, their ranks are kept filled, and their wages are 
low. Yet the wages of sailors may vary according to the 
climate. Marshall * says : " If equal wages were offered 
in ships going to the Mediterranean and the North Sea, 
the former would be full and the latter empty ; so higher 
wages are offered to the latter ships to counterbalance the 
disadvantage of the ungenial climate to which they sail." 
The dirty and dangerous work of a collier, in the depths 
of a mine, receives much higher wages than that of com- 
mon labor above ground. As Adam Smith said : " A jour- 
neyman blacksmith, though an artificer, seldom earns so 
much in twelve hours as a collier, who is only a laborer, 
does in eight. His work is not quite so dirty, is less dan- 
gerous, and is carried on in daylight and above ground." 
People, too, expect some recompense for work which in- 
volves disagreeable service, or loss of social posi- 
tion. The same author says : *' The trade of a butcher 
is a brutal and an odious business, but if is in most places 
more profitable than the greater part of common trades. 
The most detestable of all employments, that of the pub- 
lic executioner, is, in proportion to the quantity of work 
done, better paid than any common trade whatever." Lit- 
erary work, on the other hand, because (if well done) it 
brings reputation and honor, is much more poorly paid 
than the same grade of work in other professions.! " Em- 
ployment is much more constant," says Adam Smith, 
"in some trades than in others. In the greater part of 
manufactures, a journeyman may be pretty sure of employ- 

* " Economics of Industry," p. 103. 

\ "Again, the wages of domestic servants, including their board 
and lodging, are much higher than are those of women who do work 
of equal difficulty in factories or in their own homes. For the sei^vant 
must always submit to some loss of freedom, and, if she happens to fall 
under the control of an ill-mannered mistress, to some loss of dignity.'* 
— Marshall, ibid., p. 109. 
16 



2i8 DISTRIBUTION. 

ment almost every day in the year that he is able to work. 
A mason or a bricklayer, on the contrary, cr.n work neither 
in hard frost nor in foul weather, and his employment at 
all other times depends upon the occasional calls of his 
customers. He is liable, in consequence, to be frequently 
without any. What he earns, therefore, while he is em- 
ployed, must not only maintain him while he is idle, but 
make him some compensation for those anxious and de- 
sponding moments which the thought of so precarious a 
situation must sometimes occasion." " One of the points 
best illustrated by Adam Smith is the influence exercised 
on the remuneration of an employment by the uncer- 
tainty of success in it. If the chances are great of total 
failure, the reward in case of success must be sufficient 
to make up, in the general estimation, for those adverse 
chances. Put your son apprentice to a shoemaker, there 
is little doubt of his learning to make a pair of shoes ; but 
send him to study the law, it is at least twenty to one if 
ever he makes such proficiency as will enable him to live 
by the business. In a perfectly fair lottery, those who 
draw the prizes ought to gain all that is lost by those who 
draw the blanks. In a profession where twenty fail for 
one that succeeds, that one ought to gain all that should 
have been gained by the unsuccessful twenty. How ex- 
travagant soever the fees of counselors- at-law may some- 
times appear, their real retribution is never ec^ual to this."* 
204. In regard to women's wages, it will be found, in 
the main, that they are low for the same reason that the 
wages of unskilled labor are low. " In the occupations 
in which employers take full advantage of competition, 
the low wages of women, as compared with the ordinary 
earnings of men, are a proof that the em])loyments are 
overstocked; that, although a much smaller number of 
women than of men support themselves by wages, the oc- 

* J. S. Mill, " Principles of Political Economy," Book II, chap, 
xiv. § I. 



WAGES OF CLASSES OF LABORERS. 



219 



cupations which law and usage mike accessible to them 
are comparatively so few that the field of their employ- 
ment is still more overcrowded." * Shop-girls receive very 
low wages, because of the very great numbers who ar^ 
glad to get such employment. Other professions, however^ 
are slowly opening to women. In music, literature, and art, 
as nurses and physicians, they have already gained suc- 
cess. A fair field for the exercise of suitable artistic talent 
might be found in architecture. As copyists, clerks, book- 
keepers, telegraph operators and type-writers, they find 
their competitors more or less numerous. 

Yet it is also unfortunately true that custom exercises 
more or less influence on woman's wages. In teaching, 
where women have been equally officient with men, the 
former are often paid lower wages. Where this is not due 
to the fact that there are many competitors for the place 
among women, it is due to the custom which has generally 
fixed a lower rate of remuneration for women than for 
men in performing the same kind ot" work. 

205. Exercises. — i. From tha product of an iron- 
mill, in what form does a stockholder, who owns a share of 
the mill, get his part of the return ? 

2. Can either employer or employed arbitrarily decide 
what the total product of an industry shall be ? Can, then, 
either fix the total sum out of which wages are to be paid ? 
Can legislation do it } 

3. All men are said to be born free and equal. Does 
this political statement apply to industrial equality ? Can 
the socialists justly claim ecjual wages for every man, re- 
gardless of his industrial capacity ? 

4. What consequences would follow if the policy of 
limiting the number of apprentices were carried out in all 
forms of industry requiring skill ? 

5. Why pay a glass-blower for five-hours' work more 
than a porter in the same establishment for a whole day ? 

* Ibid., Book II, chap, xiv, § 5. 



220 DISTRIBUTION. 

6. Why do men working in a powder-mill expect higher 
wages than they would ask in a flouring-mill ? 

7. On what grounds may an eminent surgeon charge a 
fee of a thousand dollars for an operation which occupies 
but two hours ? 

8. Why does a railway brakeman receive lower wages 
than a locomotive engineer ? 

9. If prices of all commodities rise because of a fall 
in the value of the money in use, have laborers any reason 
for demanding higher wages ? Should they not have the 
same Real Wages as before ? 

10. When skilled labor is paid high wages, and un- 
skilled labor low wages, in the same factory, is there not a 
" conflict " between different classes of labor ? If the cap- 
ital invested receives only interest, is there any ''conflict" 
between labor and capital ? Why does the unskilled 
laborer not receive as high wages as the owner and mana- 
ger of the mill (irrespective of his interest on capital) ? 

11. Mention five kinds of laborers, and consider 
whether they belong to the same competing groups. 

12. On what grounds can it be said that honesty has 
a market value "^ 

13. Why is more skilled labor employed in the United 
States than in Africa or South America } 

14. What is the principle governing the distribution 
among the different classes of laborers of that part of the 
product which goes to wages .'* 

15. Does unskilled labor suffer as much as skilled by 
forced changes to new employments ? 

16. When business is depressed, and the total product 
of an industry possesses less value is it right that high 
dividends to stockholders should be maintained by reduc- 
ing wages ? 

17. When prices of goods decline, and the value of the 
total product declines, is there any reason for a reduction 
of wages ? 



WAGES OF CLASSES OF LABORERS. 221 

18. Why should a baker get less wages than a butcher ? 

19. If a woman thinks her wages should be raised, and 
threatens to resign her position, can she help herself so 
long as other women stand ready to take her place at the 
old rate of wages ? Is it the same when men are ready to 
take the place of strikers ? 



CHAPTER XX. 

THE INDUSTRIAL MANAGER. 

206. What was said in discussing the general princi- 
ples governing the wages of skilled labor in the last chap- 
ter will apply, with slight exceptions, to all classes of 
skilled labor, including under that term the class of indus- 
trial managers, or entrepreneurs. The manager of an in- 
dustrial operation is of the first importance, and his share 
of the product is large, because he stands in the highest 
rank of the various classes of laborers. He therefore de- 
mands further consideration. Although highest in the 
scale, he is, however, only a laborer, and may be said to 
be the child of modern industiial conditions. " In its first 
stages, the division of labor does not necessarily imply the 
introduction of the master-class. When the forms of pro- 
duction are few, when the materials are simple, when only 
hand-tools are used, when each artisan working at his 
bench makes the whole of the article to be marketed, 
when styles are standard, and the consumers of his prod- 
uct are found in the immediate neighborhood, perhaps 
within range of his personal acquaintance, the need of the 
master is not felt. But when the hand-loom gives way 
to the power-loom, when the giant factory absorbs a thou- 
sand petty shops, when many persons, of all degrees of 
skill and strength, are joined in labor, all contributing to 
a result which perhaps not one of them comprehends per- 
fectly or at all, when machinery is introduced which deals 
(222) 



THE INDUSTRIAL MANAGj£R. 223 

with the gauzy fabric more delicately than the human 
hand, and crushes stone and iron with more than the force 
of lightning, when costly materials require to be brought 
from the four quarters of the globe, and the products are 
distributed by the agencies of commerce through every 
land, when fashion enters, demanding incessant changes 
in form and substance to meet the caprices of the market, 
the master becomes a necessity of the situation, not 
alone to enforce discipline through the body of laborers 
thus brought under one roof, not alone to organize these 
parts into a whole, and keep every part in its place, at its 
proper work, not alone to furnish technical skill, and ex- 
ercise a general care of the vast property involved, but, 
beyond these, ami far more than these, to assume the re- 
sponsibilities of production, to decide what shall be made, 
after' what patteri\s, in what quantities, at what times, to 
whom the product shall be sold, at what prices, and on 
what terms of payment. The armies of industry can no 
more be raised, equipped, held together, moved, and en- 
gaged, without their commanders, than can the armies of 
war." * 

207. It is not generally realized how constantly the 
desires and tastes of mankind undergo alteration as differ- 
ent countries are modified by civilization, and to what 
extent these alterations cause a readjustment of the ex- 
change of goods in one trade with every other. Such 
changes must be watched by the manager, and the char- 
acter of his products modified accordingly. So intense is 
the competition of modern trade that he who controls 
a large capital actively engaged in production can never 
remain at a standstill ; he must be full of new ideas ; he 
must have power to initiate new schemes for the extension 
of his market ; he must have judgment to adopt new in- 
ventions, and yet not be deceived as to their value and 
efficiency. The movement of late years, also, as we have 

* F. A. Walker, " Political Economy," pp. 76, 77. 



224 



DISTRIBUTION. 



seen before (section 50), shows an increasing tendency 
toward large production. The gains from large pro- 
duction, however, can not be garnered except in so far as 
the executive ability of the industrial manager can be 
found capable of carrying it on. In fact, it seems as if 
large production, as a feature of modern industrial life, 
were a result of the development of the manager's func- 
tions. As the capacity to control large affairs has been 
displayed, the management of wider industrial operations 
has been given over into the hands of single individuals. 
It is said that a single sugar refiner supplies one half the 
consumption of sugar in the United States ; but this is 
largely due to the intense competition of refiners since the 
Civil War, The " profit " on a pound of sugar was once 
about two and a half cents, but, as refineries increased in 
number, the " profit " dropped to as low as one quarter or 
one eighth of a cent a pound. Under such conditions it 
became desirable to refine as many pounds as possible in 
order to get a proper payment for the supervision and 
care of an establishment. One refiner, having great execu- 
tive capacity and managing skill, began to gather under 
his own management and ownership the ships which im- 
ported the raw sugar, the wharves, the factories wherein 
are made the boxes and barrels, and refineries of greatly 
increased capacity. Where so much was produced, greater 
division of labor and the use of expensive machinery was 
made possible, and, as a consequence, the expense of pro- 
ducing a single pound was less for him than for the mana- 
gers of smaller refineries. He was thus able to sell all his 
product at the same price as other refiners and gain a 
larger return, or he could undersell them and get the same 
gain on each pound. Similar results are to be noticed in 
almost every trade. In fact, the intensity of modern com- 
petition and the characteristics of modern commerce are 
themselves acting to create a demand for the higher class 
of industrial managers. 



THE INDUSTRIAL MANAGER. 225 

208. It may be thought, by a casual observer, that no 
one becomes a manager of capital and labor unless he is 
himself a capitalist. It is quite true that a very great 
number of industrial establishments are entirely managed 
by their owners ; but it is also true that, practically, no 
business is now carried on simply with capital owned by 
the manager and employer. Under the extended use of 
credit now obtaining, every manager is a borrower of capi- 
tal from banks and other lenders ; and the actual capital 
owned by him often bears but a small ratio to the total 
capital used by him. He gets the use of capital largely 
because of his reputation as a successful manager in his 
own trade. More than all this, it is by no means ne- 
cessary in these days that the most skillful mana- 
ger should be the owner of the capital which is 
invested and employed under his management. 
If we examine the greatest investments of capital under 
one head in this country, we shall find that their managers 
are selected irrespective of the amount of capital they 
own, or even of the amount of capital they put into the 
business they manage. It is no longer true that, because 
a man is wealthy, he is competent to manage a cotton- 
mill ; nor that, because a man owns many shares in a bank 
he is competent, or likely to be chosen, to be its president 
or manager. Certain kinds of business which employ the 
largest amounts of capital choose their managers irre- 
spective of the capital they own, and pay them a sum, as 
wages, entirely distinct from any earnings their capital 
may receive in the form of dividends. We need only 
mention, in illustration of this statement, establishments 
such as banks, insurance-companies, railways, cotton- and 
woolen-mills, mines, etc., in which the manager only rep- 
resents the owners of the property, and receives wages 
for his care and superintendence. The millions of dol- 
lars invested by mutual-insurance companies requires the 
highest financial skill obtainable, and the wages of such 



226 DISTRIBUTION. 

managers has reached, in one case, it is said, the sum 
of thirty thousand dollars a year. Banks are also, like 
cotton- and woolen-mills, ready to pay large sums for 
successful and trustworthy managers. The dividends of 
a cotton-mill depend almost entirely on the skill of the 
manager (technically known as a " treasurer "), and high 
wages are gladly paid, because of the larger returns 
given by the mill under his control. So with railways 
and other corporations. In fact, the creation of corpo- 
rations controlled by directors, who choose a manager, 
renders possible the aggregation of small savings into 
large sums, which are then as a whole wielded by the 
skill of a single person. One person thus controls the 
capital contributed often by thousands of shareholders; 
and, although the owners of small capitals may have 
no great business capacity, yet, by the collection of their 
funds into one large sum, they may be able to secure 
the services of the best executive skill in the com- 
munity. 

209. This distinction between the function of capital 
earning interest, and of business capacity earning wages 
for great skill in mental work, is of peculiar importance in 
all discussions on the labor question. It opens an avenue 
for any man, whether rich or poor, leading upward to the 
highest prizes of industrial life, provided he has the natu- 
ral or acquired ability. " Business men are chosen by a 
process of natural selection from among many millions 
of competitors. Of many employers of labor," says Mar- 
shall, * *' in some parts of England, more than half have 
risen from the ranks of hired labor. Every artisan who 
has exceptional natural abilities has a chance of raising 
himself to a post of command." In our own country, the 
meaning of the constant talk in commercial life about 
" self-made men " is that these men have begun at the 
bottom, and by the exhibition of the rare powers of the 

* Ibid., p. 144. 



THE INDUSTRIAL MANAGER. 



227 



industrial manager have easily risen * to positions of great 
business power and responsibility ; but the class of skill- 
ful business managers is small relatively to any- 
other industrial class. There is thus a process of nat- 
ural selection \ going on, by which those who have some 
capital and great business power soon get control over a 
large capital ; while, on the other hand, those who have 
not business power will speedily dissipate a large capital if 
they happen to get control of it." It must be evident, 
then, that the supply of industrial managers does not adapt 
itself to the demand with as much readiness as in the case 
of highly skilled artisans (and this was far from being 
great). In fact, the demands made upon the powers of a 
manager in charge of a great establishment preclude the 
supposition that many persons can be found all equally 
competent for the task. It does not at all follow X that, 
because some men earn large wages of management, 
this will fill up the ranks by stimulating the supply of com- 
petitors. This may happen where no special skill is neces- 
sary ; but, where great skill is required, those who have it 
enjoy a practical monopoly, and this is the reason for their 

* " A man who has all the rare qualities that are required for man- 
aging a large business will, unless he is specially unlucky, make a high 
rate of profits on his capital. These profits will increase his capital, 
and will encourage him to devise and carry out bold plans on a broad 
basis. The confidence that others have in him will enable him to bor- 
row capital easily, and thus, because he has the faculties which are one 
condition of getting high earnings of management, he will rapidly ac- 
quire that control of a large capital which is the other condition." — 
Marshall, ibid.^ pp. 139, 140. 

f Marshall, ibid., p. 140 ; cf. Walker, " Wages," chap. xiv. 

X I can not agree with Mr. Marshall, who thinks that competition 
will force down their earnings (p. 143). I rather agree with his state- 
ment elsewhere (p. 115): "Much of the work of business is then so 
difficult, and requires so much special training and such a rare combi- 
nation of natural qualities, that the earnings of management got by it 
may be very high, without there being many men who can do the 
work and get these high earnings." 



228 DISTRIBUTION. 

high wages. Industrial managers, of proved suc- 
cess, get higher wages than the skilled laborers 
they employ, because a master is the most im- 
portant laborer in the establishment, and because, 
at the same time, the number in his class is less 
in proportion to the demand than is the case in 
regard to any other kind of labor. It is true that 
managers for kinds of business which require no exces- 
sive power and skill are much more numerous than they 
used to be ; but, as Marshall says, " the continual increase 
in the complexity of business, and the continual increase 
in the amount of capital that can be employed in business 
under a single management, are indeed giving to business 
ability of the highest order the opportunities of obtaining 
greater earnings of management than were ever heard of 
in earlier generations." 

210. In regard to the distribution of the product 
among the different classes of laborers, we now see that a 
very large share goes to the industrial manager as wages 
for a kind of skill which, for natural reasons, is practically 
monopolized. As usually viewed, this large payment is 
connected with the ownership of capital, and it is said that 
a manufacturer is getting enormous " profits." This way 
of looking at it obscures the real truth. For the owner- 
ship of capital, a manager can get no more than any in- 
vestor of equal judgment, and this payment is interest. 
But, when we see — as is very often the case in countries 
like the United States, where the natural resources are 
great, and where favorable opportunities are often open 
for great skill in industrial management — a few men earn- 
ing vast sums from the management of railways, or timber 
lands, or oil-wells, it is largely in the form of wages for 
superior skill in grasping the opportunity and knowing 
how to follow it up successfully. These large earn- 
ings are not so much interest on capital as they 
are wages of management. For without the mana- 



THE INDUSTRIAL MANAGER. 



229 



ger's peculiar and individual power the industries they 
bring into operation could not be successfully continued. 
Many a town owes its material prosperity to the chance 
that a successful manager has chosen to establish himself 
there rather than elsewhere.* One man can make the 
same business profitable while another can scarcely save 
himself from failure. In common language, the interest 
for capital and the wages of management are thought of 
as a single payment to a " capitalist," and called " profits " ; 
but nothing is more confusing. It is necessary to separate 
the idea of "profits" into its parts, especially as the 
amount of the two parts is governed by different princi- 
ples : (i) The payment for capital, according to the laws 
governing interest, and (2) the payment for managing 
ability, according to the laws governing the wages of 
skilled labor. 

211. Under these conditions we can see that the con- 
tinuance of a business depends on whether or not the 
manager receives his wages of management. In the fric- 
tion between an employer and workman, which appears in 
times of strikes, it is commonly said that his " profits " are 
high, and that he can afford to raise wages. Granting 
that the employer is receiving a large share, it is wholly a 
mistake to consider it a payment solely for capital. There 
is no little nonsense talked about labor and capital. Of 
the employer's large share, by far the largest part is 
wages of management. These wages of management are 
large, and fill the imagination of the poorly-paid laborer, 
simply because the manager stands higher up in the scale 

* "There is many a thriving town in New England whose only 
reason for growth, through fifty years from small beginnings, has been 
found in the accident of the birth there, and the long life, of a single 
energetic, able, careful man of business. There is many a * deserted 
village ' whose decay dates from the sickness or death of one man out 
of the many hundreds who thronged its streets." — F. A. Walker, 
" Political Economy," p. 75. 



230 



DISTRIBUTION. 



of workmen than his employes. Any of his workmen 
can get up into the same place if he is equally capable. 
The workman lower down in the scale, paid a low rate of 
wages, looks at the capable manager above him, paid a 
very high rate of wages, with envy, wrongly calls him a 
" capitalist " solely because of his high wages, and believes 
himself oppressed ; when, in reality, the whole truth lies in 
the fact that the conflict is not between labor and 
capital, but between different classes of laborers. 
In the distribution the most numerous and unskilled class 
gets the lowest wages, while the least numerous and most 
capable industrial class of managers gets the highest wages, 
and those between them fill up the intermediate scale. 
Managers could not get the highest wages if they were as 
many and as easily obtained as the unskilled or little- 
skilled laborers. In order to raise their wages in any per- 
manent and lasting way, the laborer must enter into a 
contest of capacity. If he moves up the scale, his 
wages will increase ; if he is careless, lazy, unthrifty, dis- 
honest, unintelligent, without ambition, he will remain 
where he is, in the lowest and largest class who receive 
the least and most precarious wages. To be sure, there 
will be cases of injustice on the part of employers so long 
as human beings continue imperfect, and against these the 
combinations of laborers have every reason to contend. 
But wages of the lower classes of labor can not be raised 
by strikes to the extent of trenching on the wages of the 
higher classes of labor, as governed by their relative num- 
bers and the relative demand for them. When a manager, 
by a rise of wages, is driven to a point where he sees that 
his own wages of management are cut into (irrespective 
of interest or capital), he may decline to work, and the 
whole establishment hinges on this decision.* Therefore, 

* " The entrepreneur finds his motive for organizing and conduct- 
ing the great enterprises of modern industry in the profits which he 
hopes individually to realize. ... It is, perhaps, to secure a net profit 



THE INDUSTRIAL MANAGER. 



231 



a rise of wages can not be pushed on indefinitely. The 
play of demand and supply, working, as described, 
between the various classes of laborers, from the unskilled 
to the industrial manager, will determine the relative 
wages of each class ; and these wages will vary by changes 
in the numbers of the classes, the character of the indus- 
tries, methods of business, and the various causes affect- 
ing the relative demand of one kind of labor as compared 
with another. It is absurd to think that, because men 
are equal politically in the exercise of civil rights, they 
are also equal industrially and economically. In 
proportion to his business capacity and skill will a man 
in the long run receive wages. 

212. There are cases, however, when labor may not 
get its due share of the product. As production is now 
carried on, the capitalist, or the manager representing 
capital, occupies a position of vantage ; the manager 
offers employment, and taking full advantage of the com- 
petition of laborers, he engages men to work at a fixed 
price per day or week. So long as laborers are not own- 
ers of capital (as they are in a co-operative establishment), 
their wages are for a given time a fixed sum. While this 
is so, it may happen that a rumor of foreign wars or some 
other cause entirely outside of the control or skill of the 
manager, and so not due to his exertions, may cause such 
a change in the demand for his products as to increase 
their value largely. His goods may sell for ten or even 

to himself of fifteen or twenty thousand dollars that he leases land 
and buildings and borrows capital, and hires the labor requisite to 
achieve an annual product of half a million of dollars. If, then, the 
conditions of trade and industry are such as to destroy, for the time, 
his profit, much more if they are such as to threaten a loss which will 
impair the integrity of the capital for which he has become responsi- 
ble, his interest in production is greatly diminished, if not destroyed ; 
he will either cease producing entirely, or, what is more likely, will 
contract the scope of his operations." — F. A. Walker, "Political 
Economy," pp. 183, 184. 



232 DISTRIBUTION, 

twenty per cent more this month than they did last month. 
Consequently there will be a larger sum to distribute ; and 
if laborers receive the same fixed wages as agreed upon 
before the rise in price, the increase due to the accidental 
change of demand will wholly fall to the manager, being 
independent of any increased exertion on their part. In 
this way, so long as wages of employes are fixed by 
agreement with employers, any unusual gains will in- 
ure to the advantage of the manager or the own- 
ers of the capital. It is to be remembered, however, 
that an unexpected failure of demand is quite as likely as 
an increase of demand ; and, while capital may gain by 
unusual good fortune, it is as often exposed to unusual 
bad fortune. If the laborers demand a share of the unu- 
sual gains beyond the control of the manager, they ought, 
in justice, to suffer a reduction of wages in case of unusual 
losses. 

213. The business man generally offsets losses by 
gains, and in the long run expects to get an average re- 
turn such as he considers sufficient to recompense him for 
interest and for wages of management. This brings us to 
the so-called doctrine of " equivalence of profits," by 
which it is claimed that " profits " tend to an equality. 
Considering this doctrine in the light of the distinction 
between interest and wages of management, it does not 
seem possible to establish its truth, as usually stated. If 
" profits " include wages of management, then there is not 
only no tendency toward an equality between profits in 
the same trades, but not even between the profits of differ- 
ent men in different trades.* The only possible way in 

* As Mr. Mill, who included wages of management under profits, 
says of "gross profit," it "varies very greatly from individual to indi- 
vidual, and can scarce be in any two cases the same. It depends on 
the knowledge, talents, economy, and energy of the capitalist himself, 
or of the agents whom he employs, on the accidents of personal con- 
nection, and even on chance. Hardly any two dealers in the same 



THE INDUSTRIAL MANAGER. 



233 



which the doctrine can be truly stated is that there is a 
tendency to an equality of return on equal invest- 
ments of capital, or, in other words, thdt the rate of 
interest tends to an equality. If in one trade there are 
peculiar risks incident to the investment of capital, as, for 
example, in the manufacture of gunpowder or dynamite, 
then such capital will expect a larger rate than in another 
trade where these risks do not exist. But in two trades 
where the risks are the same, and the security for the in- 
vestment of capital is the same, the rate of interest ex- 
pected will be the same. For, if the rate be not the same, 
there will be a removal of capital from the less remunera- 
tive to the more remunerative industry; provided, of 
course, that the two trades lie within com- 
peting groups, between which capital can 
readily move. The increased competition 



E 

of capital will thin lower the rate of interest 



in the more remunerative trade to a com- F 
mon level. This transfer of capital goes 
on with great readiness through the agency 
of banks.* Each industry is constantly 
borrowing capital from the general reser- 
voirs of capital seeking investment, that is, B D 
from the banks. If A B represents the 
amount of capital used in one industry, and C D that in 
another, then it is not necessary that the whole of the sur- 

trade, even if their commodities are equally good and equally cheap, 
carry on their business at the same expense, or turn over their capital 
in the same time " (Book II, chap, xv, § 4). But Mr. Mill urges the 
tendency of profits to an equality in different employments, thus : 
*' On the average the various employments of capital are on such a 
footing as to hold out, not equal profits, but equal expectations of 
profits to persons of average abilities and advantages^ But there can 
be no real comparison of managers in different employments any more 
than in the same employments, so far as their earnings of management 
are concerned. 

* See Part II, chap. xxix. 
17 



234 



DISTRIBUTION. 



plus of capital (A F) in the former over the latter should 
be transferred to create the equality, but only one half of 
it (A E). This is a process constantly going on between 
different trades. If furniture- men find a lively demand 
for their goods, while the demand for shoes is decidedly 
slack, the former will be frequent borrowers at the banks, 
while the latter will have less than their former need for 
loans. In this way the stream of capital seeking invest- 
ment is diverted from industries where less capital is 
wanted to those where it is in greater demand. 

214. Exercises. — i. In the mountains of Tennessee 
families make their own cloth, raise their own food, live 
practically under a system of barter, wages are generally 
paid in kind, and money is little used. Compare these 
industrial conditions with those of Pittsburg, Pennsylvania. 
Why is the industrial manager likely to be found in one 
of these places and not in the other .? 

2. Can you mention any large factory or institution in 
your neighborhood which has grown in size and pros- 
perity chiefly through the skill of some one manager? 

3. How do you explain the fact that men who have 
held the offices of Secretary of the Treasury, or Comp- 
troller of the Currency, are sought for by banks as man- 
agers .-* 

4. In a shoe factory, employing one thousand men of 
varying capacity, there is one manager controlling the 
whole. Why can not each of these one thousand men 
manage a factory equally well } 

5. What just criticism could you make of the state- 
ment that, '' when profits increase, wages suffer " .? If, how- 
ever, it were said that, of a given product, "when the 
manager's wages increase, other wages suffer," does that 
have any bearing on the question whether or not there 
is a " conflict of labor and capital"? Is the manager's 
share due to the ownership of capital ? 

6. If the rate of interest for the use of capital is fall- 



THE INDUSTRIAL MANAGER. 



235 



ing, and yet the efficiency of modern processes of produc- 
tion tends to increase, thereby giving more to divide, can 
it be said that capital is receiving an increasing share ? 
Between what classes, then, is the real contest going on for 
s'lares in this portion ? Has every laborer a chance ? 

7. If trades unions refuse to admit ambitious men 
from lower occupations to their more highly-skilled trades, 
does that stand in the way of any laborer who wishes to 
fit himself so that he can stand higher up in the scale of 
industrial capacity, and so claim a larger share of the 
product ? Yet, if the unions increase in numbers, will 
not that lower their wages ? 

8. Why is it that strikes made at times when the man- 
ufactured goods are falling in price are almost inevitably 
failures ? 

9. Are the wages of managers equal in the same em- 
ployment ? Are all managers in the same employment 
equally successful ? Is the rate of interest for use of 
loaned capital generally the same to all the managers in 
the same employment ? 



CHAPTER XXL 

WAGES AND PRICES. 

215. In studying the principles according to which 
the value of the product was governed, we found (Chapter 
XI) that, where competition was free, two articles whose 
costs of production were the same would exchange 
equally for each other. But the cost of production means 
the sacrifice undergone in producing a thing. Men labor 
and save to make production possible. The exertions of 
labor and the abstinence required for the use of capital 
form the sacrifices in all production. In proportion to 
these sacrifices will commodities be exchanged for one 
another, or, in other words, when the sacrifices are the 
same, their value will be the same ; so that, where compe- 
tition is free, commodities will exchange for one another 
in proportion to their sacrifice in production. If a bag of 
potatoes requires two days' labor, and a bag of corn one 
day's labor (and the same capital is needed for each) in 
production, the bag of potatoes will tend to exchange for 
two bags of corn. 

When commodities are produced in different groups, as 
in the case of corn and iron rails, and there is no free 
competition of labor and capital between the two different 
groups of industries, the exchange value depends not on the 
cost of production, but on reciprocal demand (see Chap- 
ter XIII). We have seen that, when labor could not move 
readily between two industries, the same exertion might 
(23O 



WAGES AND PRICES. 



237 



be paid at different rates. If the demand for corn is 
strong, and that for iron rails is weak, then corn will 
exchange for more of iron rails than it would under other 
conditions. So the value, where competition is not free, 
varies according to the demand for the products of a given 
industry as compared with the demand of that industry 
for other products. 

216. In connection with this brief review of the causes 
which give value to the product, let us recapitulate the 
parts into which this value is divided according to our 
principles of distribution. Corresponding to the various 
sacrifices there are sums given as remuneration for the 
sacrifices ; for labor, wages, for capital, interest, etc. 
These remunerations, or sums into which the product is 
divided, may be usually found in the following form : 

1. Payments for rent of 
buildings, ground-rent, etc. 

2. Taxes. 

3. Insurance. 

4. Machinery, tools, etc. 

5. Materials. 

6. Wages of workmen. 

7. Wages of manager. ) u o /=!. i> r 1 

' ^ f , f " Profits of employer 

8. Interest on capital en- f / o\ 

gaged (1-6). ) "''*^- 

These various sums added together (1-8) may be prop- 
erly called the expenses of production of a commodity. 
A certain sum is to be paid for given kinds of labor (de- 
termined as in Chapter XIX) and a certain sum for in- 
terest (see Chapter XVII). The expenses of production, 
being a concrete payment for the various sacrifices, when 
added together, make up the price. The value, or price, 
should, of course, cover all the expenses of production, if 
conditions are normal. 

217. Under the industrial system now existing, the 
employer takes a position, as it were, between 6 and 7 in 



" Cost of labor," or out- 
lay, to the employer 

(1-6). 



238 DISTRIBUTION. 

the preceding list, facing 1-6, with 7 and 8 behind him. 
To him 1-6 are all in the nature of outlay.* Whatever 
he advances for buildings, machinery, materials, taxes, in- 
surance, and wages for his workmen, he properly regards 
as an outlay which must be repaid to him out of the prod- 
uct. The product, in addition to returning the outlay 
(1-6), must also give him wages (7) and interest (8) on all 
the capital he advanced. For his outlay he gets a finished 
product from the laborers : he advances the capital in the 
form of wages, material, etc., and runs all the risks of fail- 
ures, errors, and unexpected disasters like fire, explosion, 
war, etc. The manager, then, bends all his energies to 
see how this outlay can be made to bring the greatest re- 
turn. The important matter to him is not the actual or 
absolute amount of the outlay, but the relation of the 
outlay to the return. f His return costs him what he 
gives as an outlay. Now, if the return increases without 
any change in his outlay, his " profits " (7 and 8) are 
larger ; if his return diminishes, without any change in his 
outlay, then his " profits " are less. Also, if he were to 
increase his outlay, and thereby increase his return in 
greater proportion he would gain greater "profits" (wages 
and interest). 

218. At first sight, this might make it appear that the 
interests of the employer and the workmen were directly 
opposed to one another, that what the employer gained 
the workmen lost, and what the workmen gained the em- 
ployer lost — but this is not necessarily true. We can now 
see the importance of the truth that the relation of the 
outlay to the return is what the employer is most con- 
cerned about. Here is a manufacturer of calico who ad- 

* Business men sometimes loosely speak of 1-6 as their *' cost of 
production," meaning really the outlay, before they get their own 
"profits." 

f This is the conception known to economists as " cost of labor" 
to the capitalist (cf. Mill, Book II, chap, xv, § 7). 



WAGES AND PRICES. 



239 



vances $80,000 during the year, of which $50,000 may be 
spent in wages ; this is his outlay. He gets from his fac- 
tory during the year 2,000,000 yards of calico, which he 
sells for five cents a yard, making his return $100,000. 
His " profits " (wages and interest) are then $20,000. But 
suppose he can so manage his factory and workmen that, 
with no more outlay, their efficiency is so greatly increased 
that they turn out 200,000 yards more of calico— perhaps 
because the machinery is run faster, or waste is saved, or 
the men work in better quarters. In that case the return 
is increased by $10,000. Thus the employer might be 
able to increase the wages of his workmen by $5,000, and 
yet increase his profits by $5,000. In this case his outlay 
is increased to $85,000, and his return to $110,000, so that 
his "profits " (wages and interest) are now $25,000. Here 
is a case, then, which illustrates that increased efficiency 
in the processes and labor of production may raise 
both wages and " profits," without taking from the 
one at the expense of the other. It is consistent, more- 
over, with our statements that an increase in the value of 
the product will make possible an increase in the fund 
from which both wages and interest are paid (see section 

176). 

219. In connection with efficiency of labor in pro- 
duction we must, of course, consider everything which 
tends to increase the return to a given amount of sacri- 
fice, or exertion. The same farmer, with the same capi- 
tal, can raise many more bushels of grain on the rich 
prairie-lands of the Western States than he can on the 
thin soil of New England ; thus it is clear that natural 
resources have to be taken into account (see Chapter 
VI). In fertile countries wages and profits can be higher 
than in those countries which are less favored by nature. 
It will be remembered here that this agrees with our re- 
sults as to cost of production : where cost, or sacrifice, 
was low, wages were high (see section 107). 



240 



DISTRIBUTION. 



Above all, we must consider inventions and ma- 
chinery as affecting efficiency of labor. If the sacrifice 
of a laborer, working with his hands, produces i,ooo yards 
of calico ; and then, if, by the introduction of helpful 
machinery, the same laborer, in the same time, produces 
by its help 10,000 yards, the value to be divided between 
wages and interest will be greatly increased. So that la- 
bor-saving machinery, which allows more to be produced 
with less labor and sacrifice, increases the efficiency of 
labor, and makes higher wages possible. Those who have 
not studied the subject might say that other laborers are 
thrown out of employment. But, without arguing the 
principle, the facts in the United States are against this 
theory.* In 1880, as compared with i860, the number of 
manufacturing establishments increased from 140,433, to 
253,852 ; the capital engaged, from $1,009,855,715 to 
$2,790,272,606 ; the number of hands employed, from 
1,311,246 to 2,732,595 ; and the total amount paid in wa- 
ges, from $378,878,966 to $947,953,795. In this period, 
during which great improvements in machinery have been 
going on, not only were an increased number of workmen 
employed, but the wages paid were increased in a still 
greater ratio than the number of workmen. The reason 
of this has been explained (section 186). In the cotton- 
mills of Lowell in 1830, one operative produced 4,321 
yards (standard sheetings) per year ; but in 1884, because 
machinery had been wonderfully improved, he produced 
28,032 yards. In 1830 his wages were $164 per year ; in 
1884 $290, Moreover, the hours of labor have fallen from 
13 and 14 hours per day to 10 and 11 hours. 

220. At the same time that efficiency of labor has in- 
creased the value of the product, and so increased wages, 
it has made possible a fall in prices. Between 1840 and 
1883, cotton goods have fallen in price 22 per cent, al- 
though wages have increased 64 per cent. Referring to 

* See United States Census, 1880, Compendium, pp. 928, 930. 



WAGES AND PRICES. 241 

our list of elements in the manufacturers' outlay (section 
216), we can see that, even if wages (No. 6) rise, an in- 
crease of the product by a better use of their exertions 
with machinery and materials will compensate the manu- 
facturer for the higher wages. An employer, therefore, 
has no opposition to high wages in themselves ; he is most 
concerned with the results of the labor. He can pay high 
wages, if the labor is efficient. This also explains the 
fact that, when " business becomes dull," an employer 
prefers to discharge the poorest men, who are paid the 
least wages, and keep with him his best men, who are 
paid the highest wages. The highest paid laborer is usu- 
ally the cheapest man. The workman who foolishly 
** makes work," by prolonging a task as long as possible, 
is a dear man, and is the first to be dropped in bad 
times. 

We have thus seen that prices are not necessarily- 
high because wages are high. The price of a cer- 
tain thing can be low if many of that thing can be pro- 
duced for no great sacrifice. Thus, in our western grain- 
fields, wages are high ; but the price of a bushel of wheat 
is so low that we undersell Russia and India in the mar- 
kets of Europe. This is because the labor and capital 
produces so many bushels in a joint effort that, although 
the price of one bushel is low, the value of the total prod- 
uct is great, and so a large share out of the product can 
go to both labor and capital. 

221. It may happen that wages may be raised or low- 
ered in a single industry and not in others. In such a 
case the change of wages will affect the price ; but 
only because the change is not universal over all industries. 
For (in section 216), in the items entering into the ex- 
penses of production of a commodity, one is wages ; and 
the price has been supposed to cover the expenses of pro- 
duction. Now, if by a strike or other cause the employ- 
ers in a certain industry were obliged to pay higher wages 



242 DISTRIBUTION. 

for the same efficiency, they would make an increased 
" outlay " for the same old return. They would, therefore, 
raise the prices of their particular commodity. In Cam- 
bridge, a strike of horse-car employes for higher wages 
once caused a rise in the price of a ticket from five cents 
to six ; the increase of wages being taken from the patrons 
of the road, rich and poor, not from the pockets of the 
company. If such a process were to be followed equally 
in all other industries, if wages were to be raised pro- 
portionally in all industries, then the price of every com- 
modity would be raised proportionally to every other, and 
no producer would be any better off. For it makes no 
difference whether A sells his commodity for five cents, 
and buys another from B for five cents, or whether A 
raises the price of his goods to six cents, and B does the 
same, and then they exchange their goods for one an- 
other. They would be exactly where they were before. 
Just in proportion as A raised his price, would he be 
obliged to pay more for everything else he bought, and 
his expenses would be increased accordingly. If all la- 
borers, in all industries, receive higher wages, the values of 
commodities relatively to one another will not be changed, 
and their relation to the single commodity money, or 
their prices, will accordingly not be changed. In" fact, 
however, a change of wages is never universal, but affects 
one industry or one district at a time ; so that the rise 
of wages, unaccompanied by an increase of efficiency, is 
usually followed by a rise of price for the article affected 
by the change. 

222. Exercises. — i. Do wheat and iron exchange 
between England and the United States according to their 
costs of production (i. e., sacrifices) ? Is there free com- 
petition (i. e., free movement of labor and capital) between 
the two countries ? 

2. If the price of steel rails should fall temporarily 
below the expenses of production, what would be the 



WAGES AND PRICES. 243 

effect on the supply ? If the price rose above the ex- 
penses of production ? 

3. Are there any reasons why it is an advantage to an 
employer to make his workmen feel contented, or to see 
them grow in intelligence ? 

4. Should laborers feel that machinery is hostile to 
their interests ? 

5. Laborers on railway embankments in India were 
paid, according to Mr. Brassey, from 9 to 12 cents a day, 
but in England from 75 to 87 cents a day, and yet the ex- 
pense of building a mile of railway was about the same in 
the two places. How do you account for this .'' 

6. If wages are high in agriculture in the United 
States, and yet prices of agricultural products are so low 
that we can undersell European countries, what must be 
the natural conclusion in regard to other industries than 
agriculture which can not sell at low prices and also pay 
high wages ? Are these other industries as productive ? 

7. The late fall of silver considerably cheapened the 
material used in making silverware, but the rate of wages 
paid in this industry was increased at about the same 
time, and prices of the ware remain about the same as 
before. Has the " cost of labor " to the capitalist, or em- 
ployer's outlay, remained the same ? 

8. If wages of shoemakers rise while those of bakers 
do not, what will be the effect on the relative prices of 
shoes and bread ? 



CHAPTER XXII. 

RENT. 

223. The ordinary use of the word Rent is so differ- 
ent from its meaning in political economy that some con- 
fusion may be avoided by noting this difference. Persons 
speak popularly of paying a "rent " for a house, or a store, 
or a warehouse, but a large part of such a payment is 
really a return for capital invested in the buildings. The 
return to capital is termed interest, not rent. In the eco- 
nomic sense, however, rent is the payment which an 
owner receives for the use of natural agents, and 
these "natural agents" include land, whether arable or 
timber land, mineral deposits, water-power, or land pecul- 
iarly suited for building purposes. Rent is a payment, 
not for the use of another's capital, but for the use of 
natural agents belonging to another. Rent is possible be- 
cause natural agents are not unlimited in quantity, as air 
or sunshine is. As soon as certain kinds of land are in 
supply less than the demand, a price can be exacted for 
their use by the one in whom ownership is vested. 

We must now try to find the general principle which 
regulates the amount of rent that each owner can take 
from the produce as his share. For this purpose we shall 
speak only of land, and of agricultural land ; for the prin- 
ciples thus found will also be applicable to other natural 
agents. 

224. The whole theory of rent, which forms one of the 

(244) 



RENT. 245 

fundamental parts of political economy, is based upon the 
law of diminishing returns from land. If we accept 
that physical law, affecting the powers of the soil, we must 
logically accept the doctrine of rent. On every farm in 
the country the law of diminishing returns is being daily 
exemplified ; for every farmer knows that, if he were to 
double the capital and labor on each acre in cultivation 
steadily, he could not each time double the produce. The 
law in question is not based upon what men may be able 
or willing to do, but upon the inherent physical capabili- 
ties of the soil which Nature has given us. Private dis- 
patches are sometimes written in invisible ink, which, 
when exposed to certain treatment, reveals the words of 
the message ; in a similar way, the soil, by its very nature, 
is required to reveal the law of diminishing returns, and the 
process which reveals it is the demand for an increased 
amount of food. This increased demand for food comes 
with the growth of population. So we see the connection 
of the various forces leading up to rent : (i) an increase 
of population, causing a demand for more food ; (2) the 
demand for more food, which brings to light the fact of 
the diminishing returns from land ; (3) consequently, be- 
cause the best grade can not produce unlimited food, this 
explains why different grades of land are in cultivation at 
the same time. Whenever this situation is created, rent 
will exist, as we shall soon see. 

225. Lands are of varying degrees of productive- 
ness. They vary not only in their power of producing 
different articles, such, for example, as wheat and to- 
bacco, but they do not all produce the same thing equally 
well. No state, county, township, or farm is like any other 
state, county, township, or farm. The slope, drainage, 
constituents of the soil, vary from field to field even in the 
same farm, so that some lands afford a large return to la- 
bor and capital, while others do not ; the former are supe- 
rior, and the latter are inferior, soils as regards fertility. 



246 DISTRIBUTION. 

Two pieces of land, which are of equal fertility, as re- 
gards their natural productiveness, might also be so af- 
fected by situation that one would be classed as supe- 
rior and the other as inferior. Suppose that one piece, 
A, were situated near a railway station, and another, B, 
twenty-five miles away from any market, and that each 
parcel of land produced one hundred bushels of wheat. 
In the case of B, the value of ten bushels might be spent 
in carrying the produce to the station near which A was 
situated. The farmer of B would be no better off than if 
he cultivated land close by A, which produced but ninety 
bushels. The cost of transportation enters into the out- 
lay of producing wheat on B, so that, although equal in 
natural productiveness, B is really inferior to A by 
situation ; consequently we may speak of superior and 
inferior lands, although this difference of grades may be 
due solely to situation. 

226. It has been already explained (in section 114) 
that there can be but one price, or value, for grain, al- 
though it is grown on soils of different degrees of fertility. 
It was shown that the demand of increasing numbers for 
food raises the price until it is sufficient to repay the 
farmer for producing more food from poorer soils. It is 
more expensive to grow grain on the inferior soils, and 
yet the demand for food is not satisfied by the quantity 
produced on the better grades (and sold at a price which is 
low, but still enough to reward the sacrifices incurred on 
rich soil). The grain produced on both the superior 
and inferior soils is needed, and that is the reason 
why the price was forced up until more was supplied from 
inferior land. The people on the rich land, however, 
growing grain at less cost, might be willing, some one may 
suggest, to sell their grain for a less price than that neces- 
sary for those cultivating inferior soils. They might, it is 
true, and so a millionaire might give away his fortune to 
the first poor man he met, but such things are rarely done. 



RENT, 



H7 



If the price were lowered by such underselling, the culti- 
vators on the inferior lands (whose cultivation is necessary 
to supply the food for the whole community) would not 
receive the usual returns for the cost of production, and 
they would cease to be worked. This would cut off the 
supply, and there would not be enough food for all. Thus 
an urgent demand would be created, and the price would 
be instantly raised, and would be kept permanently at a 
rate which would repay the farmers for cultivating the 
poorer soils. The value of this class of commodities is, 
in short, regulated by the cost of production on the poor- 
est soils in cultivation (Chapter XII) ; the cultivator of 
rich soils gets just as high a price as the cultivator of 
poorer soils. 

227. When different grades of land are in cultivation 
at the same time (producing the same article), the cultiva- 
tor of the richer soil receiving the same price per bushel 
as the cultivator of the poorer soil, the former will get 
more for his work and capital than the latter. The same 
capital and labor produces on the rich land more bushels 
per acre than it does on the poorer land ; and, as the price 
at which each bushel is sold is the same, the return to the 
former capital and labor is greater than the return to the 
latter capital and labor, although they are equal in both 
cases. This surplus of the value of the product of the 
richer over the poorer land, when both are needed for 
cultivation, is Rent ; and the whole of it goes, under free 
competition, to the landlord or owner of the land. Sup- 
pose one man. A, to be using the same amount of capital 
and labor in agriculture as another man, B. Although 
working on inferior soil, B gets enough to pay him the 
customary returns for his sacrifice in production (the main 
part of which is interest on his capital and wages for his 
laborers in working the land). A, however, having rented 
a better piece of land, gets more of a return than B. Now, 
if B's return is the sum which one would ordinarily ex- 



248 



DISTRIBUTION. 



pect for the given amount of labor and capital here em- 
ployed under free competition, A can not hope to get 
more. The owner can say, *' B shall have the land. All 
the surplus over the sum which repays him for his sacri- 
fices in production he will pay to me. For he goes on 
working now for a sum just equal to the latter amount ; 
he gets interest on his capital and good wages for his labor, 
and he could not do better than that in any other busi- 
ness." Just so long, then, as there is any one, like B, who 
will take the richer land and agree to pay the landlord the 
excess above the sum which repays him for his sacrifices 
in production, the amount of rent on that grade of 
land will just equal the excess of the value of its 
product over that of the poorest land which is 
cultivated to meet the demand of the community. 
The law of rent was first stated and applied in a clear 
way by Ricardo at the beginning of the present century. 
It is, therefore, commonly called Ricardo's law. 

228. This law of rent is capable of simple illustra- 
tion. Suppose we have four grades of land which pro- 




duce, respectively, 24, 18, 12, and 6 bushels of wheat 
whenever a fixed amount of capital and labor is expended 
on each. At first suppose that the demand for wheat can 
be wholly supplied from the first grade when the price is 
$1 a bushel, so that $24 is the return necessary to satisfy 
the labor and capital. As yet the other three grades can 
not be cultivated, for the second will yield only 18 bush- 



RENT, 249 

els, or $18, while $24 is needed to pay the sacrifices of 
production. Whenever, by an increase of population, 
more wheat is needed than can be grown on the first 
grade, the price will go up under the increasing demand 
until more can be supplied from the second ; but the sec- 
ond will not be cultivated until the same amount of capi- 
tal and labor, which, when employed on the first, received 
a return of $24, will also receive a return of $24 when 
employed on the second. So 18 bushels must sell for f 24, 
and the price must rise to $1.33^. Now, we have two 
grades of land in cultivation at the same time, 
producing the same grain, and the better of the two 
must, therefore, pay a rent. The price now being 
$1.33^, the 24 bushels grown on the first, by the same 
amount of labor and capital which produces 18 bushels 
on the second, will have a value of $32. But we have 
supposed that $24 was sufficient to pay the sacrifices of 
production on the first grade, so that land of the first 
grade is yielding, at the higher price, %Z more than the 
usual returns to labor and capital. Then the first grade 
can pay $8 of rent, and yet the capital and labor will be 
as well paid as that employed on the second grade of land. 
The payment of rent equalizes the position of the two 
farmers. 

Then, if the price should rise to %2 a bushel, the third 
grade will return $24, and it will come into cultivation ; 
but at that price the first grade will return $48 and the 
second %Ty() ; so that the first grade will pay in rent 
$48 — $24, and the second grade will pay in rent %-^(i — 
$24. In a similar way, if the price should ever rise to $4, 
the fourth grade would pay the necessary expenses of 
production, ^24, and the first would yield a surplus over 
the fourth of $72, the second of $48, and the third of 
$24. 

229. It might be said, however, that instead of culti- 
vating new land more capital and labor might be put upon 



250 



niS TRIE UTION. 




the first grade. But this will follow exactly the same 
principle as that just explained. Suppose that a second 
application, or " dose," of labor and capital were made on 
the first grade, and that it yielded only i8 bushels. There 
are now two " doses " of labor and capital on the best 

land, the first yielding 24 bushels 
and the second yielding 18 bushels, 
or, altogether, 24+18 bushels. But 
this second " dose " would not be 
given unless it received a sufficient 
compensation, which, again, we may 
suppose to be $24. When the price 
goes up to $1.33^, so that 18 bush- 
els will yield $24, the second 
" dose" will be applied, and not before. The first " dose," 
however, still yields 24 bushels, and at the higher price 
returns $32, or a surplus of $8 over the second "dose." 
Therefore, the first application of labor and capital can 
pay a rent of $8, and yet receive as much of a compen- 
sation as the second " dose." In the same manner, succes- 
sive "doses " can be applied to the same piece of land, 
as well as to different grades of land, 
as shown in the annexed figure. But 
the third " dose " will be applied 
only when the price has gone up to 
$2 and when its 12 bushels will sell 
for $24, and the last " dose " will 
be applied only when the price has 
risen to $4 and when its 6 bushels 
will sell for $24. The basis of the 
whole theory is the law of diminishing returns to the ap- 
plication of equal amounts of labor and capital ; and it 
makes no difference whether these successive applications 
are made on the same land or on different grades of land. 
230. When a farmer is looking over a farm which he 
intends to rent, he will consider how much each field can 




RENT, 



251 



produce. He will estimate his expenses as nearly as he 
can, and he can offer as rent the surplus of the produce 
over these expenses (which include wages and interest on 
his working capital). Land lying within the limits of the 
farm, which will only pay for the sacrifices of production, 
will have no effect in fixing the rent ; for they do not 
offer any surplus which can be paid as rent. The farmer 
will consider those fields only which give a surplus over 
the wages and interest, and, considering them alone, he will 
count up the amount of rent. But when he gets posses- 
sion of the farm he will cultivate the other land within the 
farm which yields only sufficient to pay him wages and 
interest ; for the cultivation of this land is needed by the 
population, since the price would not have advanced 
sufficiently to warrant its cultivation had not its produce 
been demanded by the community. This land which 
pays no rent the farmer will work for a very good reason. 
If he has any capital to invest, he can put it into the culti- 
vation of this kind of land, because it returns him, besides 
wages, the usual interest, and that is all he could get if he 
invested his capital in any other occupation, and it is all 
he gets on any of his land, even on the richer land for 
which he pays rent ; for the rent takes off all the surplus. 
So that almost every farmer who leases land finds some 
fields in his farm on which he pays no rent, but which 
he will cultivate because they return him the current re- 
wards for his sacrifices. This kind of land is conveniently 
termed the margin of cultivation ; for land poorer than 
this will not be cultivated for a profit, and this kind of 
land marks the poorest quality, whose cultivation is ren- 
dered possible by the existing prices of agricultural prod- 
ucts. If the price rises, poorer land can be cultivated ; 
or, as it is said, " the margin of cultivation descends." 

231. The margin of cultivation gives us a means of 
estimating the amount of rent. If, on the horizontal base 
line A D, we erect perpendiculars at A, B, C, and D, in 



252 



DISTRIBUTION. 




height proportional to the returns from applications of 
equal amounts of labor and capital on four different grades 
of land (or from successive applications of equal amounts 
of labor and capital on the same land), S D will represent 

the return to the 
Qf--^ - last application, and 

S D will be the prod- 
uct of that land 
which yields a sum 
equal to the current 
rewards for sacri- 
fices in production 
but pays no rent. 
Since S D is a suffi- 
cient remuneration, M C will be more than a sufficient 
remuneration by just the amount M N cut off by the line 
R S drawn through S parallel to A D ; and so on with 
B T and A Q. Thus the whole product of the farm which 
contains these four grades of land is represented by the 
whole area contained by A D S Q, the whole of the vari- 
ous expenses of production by the area A D S R, and con- 
sequently the part of the produce which can be paid in 
rent to the owner is represented by the area R S Q (that 
part above the line R S). From this illustration we may 
understand the statement of the law of rent. The rent 
of any piece of land is the excess of its produce 
over the produce of that land which just repays 
the current rewards for the sacrifices of produc- 
tion. 

232. We are now in a position to accept as true what 
at first seems to be a startling error. We hear a great 
deal about the incomes of landlords and the immense sums 
paid to them as rent by tenants. The sums are no doubt 
very great ; but rent does not affect the price of ag- 
ricultural products in the least. No ma ter what the 
rent is, the price of wheat or of the bread made from the 



RENT. 



253 



wheat will not be affected thereby. Rent does not affect 
the price. On the contrary, price affects the rent ; price 
is the cause and rent is the effect. It has been already 
explained (section 114) that the value and price of grain 
are fixed by its cost of production on the worst land which 
is cultivated in order to supply the quantity needed ; and 
we have just seen that this land (the " margin of cultiva- 
tion ") pays no rent. It is very clear that the price is de- 
termined on land which pays no rent, and, if that land 
pays no rent, it is evident that rent can have nothing to 
do with the price. 

The proposition that it is the price which governs the 
rent follows from what was said in a previous section 
(224). The demand for more food raises the price. This 
makes it necessary to cultivate inferior soils. The further 
down cultivation is forced to poorer and poorer soils, 
the larger the surplus of the better lands over the poorest 
in cultivation, and consequently the larger the amount of 
rent which can be paid. In the figure in the last section, 
if S D were shorter, the line R S would be lower down, 
and this would increase the area R S Q, which represents 
the rent. Rent, then, does not affect the price of agricult- 
ural products, but the price affects the rent. 

On the land which pays no rent but which fixes the 
price of the product, the shares of labor and capital will 
be distributed independently of rent. Rent, then, does not 
affect the value of the product to be divided between labor 
and capital. The sum paid for rent is in proportion to 
the superiority of the land used by the farmer, and this 
places all farmers on an equality. We now see why it 
was possible without error to pass by the share of rent 
(in section 160) before settling the shares of labor and 
capital. 

233. We have thus explained how an increase of popu- 
lation demanding more food brings the law of diminishing 
returns into operation, and, by requiring the cultivation of 



254 DISTRIBUTION. 

different grades of land, at the same time creates rent. It 
now remains to state what the forces are which coun- 
teract the tendency of rent to increase. In brief, 
they are those which we saw before (section 22) counter- 
acting the law of diminishing returns. Any improvements 
in cultivation, in machinery, in intelligence, in chemical 
knowledge of the soil, in methods of transportation, etc., 
which check the law of diminishing returns, will help to 
keep rent from rising. But every such gain which cheap- 
ens food only makes possible a larger population. The 
tendency of population to increase is so strong that cheap- 
ened food is only a permission for further increase. The 
discovery of new lands, the cheapened cost of transporta- 
tion by railways and steamers from the Western States to 
England, has enabled England to maintain a larger popu- 
lation than could otherwise have been possible ; thus the 
growth of population has generally been mani- 
fest as soon as improvements come, and has kept 
agricultural products from falling (see Chart IV). The 
opening up of new lands by railways and the progress of 
improvements in agricultural machinery ought to have 
materially cheapened food for our people ; but this has 
been prevented by the steadily advancing tread of an 
increasing population. As fast as improvements lower 
prices the growth of population raises them. 

234. Where the farmer is also the owner of the land, 
as is generally true of the United States, the principle by 
which the rent is ascertained holds true all the same. In 
considering the share which goes to the landlord it makes 
no difference as to its amount whether the farmer pays it 
to another person as landlord or pays it to himself as land- 
lord. If the farmer is also the landlord he pays 
rent to himself, and may also receive a return for his 
wages and for the use of his working capital. Whenever 
the return is greater than will pay the rewards of sacrifices 
in production, the excess is rent to whomsoever it is paid. 



RENT. 255 

The doctrine applies to any land in any country where 
the law of diminishing returns is in operation. In the 
United States, however, as regards wheat, it may be said 
that we have as yet scarcely occupied all our best grade 
of land ; but the time will soon come when that can no 
longer be said. 

235. The general principle of rent, as thus explained, 
applies also to natural agents of any other kind than agri- 
cultural land, such as water-power and mineral deposits. 
But we will confine ourselves here to one other case, the 
one in which land is used for building purposes. The 
payment for such land is called ground-rent. No one, 
of course, would let land for building purposes, unless the 
builder would offer more rent than the land would yield 
when used for agriculture ; that is, the ground-rent must 
always be more than the agricultural rent of the same 
land. But the best business sites in the closely-settled 
centers of great cities are, in their nature, limited in quan- 
tity, and bear a very high price. A good situation gives 
the opportunity to sell goods rapidly, and it is much 
sought for; but, on the outskirts of a town, the land will 
not be so valuable for building purposes. On the basis 
of desirability for buildings, land in a town or city can be 
arranged on a graded scale, from the land which pays a 
fraction more than agricultural rent to the land which 
contains the largest warehouses, or dry-goods stores, or 
banks. In proportion to its desirability will it obtain a 
higher rent, and this may be raised to any sum. 

236. It is to be observed that, in stating the process 
by which the amount of rent is to be ascertained, we have 
gone upon the supposition that competition is free. By 
this we mean that the owner is trying to get the utmost he 
can in rent, and that there are farmers competing together 
for the land, so that the one who gets it is obliged by com- 
petition to give in rent all that a competent farmer could 
pay. It is to be understood, however, that, while the eco- 



256 



DISTRIBUTION. 



nomic rent is thus to be ascertained, the actual rent may be 
less or more than this. A landlord may not wish, or public 
opinion will not permit him, to exact the whole of the 
surplus which we have explained as rent ; and, on the 
other hand, tenants may be ignorant, or may be over- 
reached by the landlord or his agent. A farmer, also, 
may have taken a lease for a long term of years at a fixed 
rent in money, and when grain falls in price he gets less 
for his produce, but is under an obligation to pay the 
same rent as before. In such w^ays a farmer may suffer so 
long as he holds the lease, while the landlord may be pro- 
tected from a loss which should fall wholly on him. In 
all such cases, although there are modifications in the 
practical operation of the principle, the principle is still 
there ; and because of its existence only are we able to 
know whether the tenant or the landlord is getting his 
proper share. 

237. Exercises. — -i. When a ship is chartered for a 
voyage, should you say that rent is paid for its use ? 

2. Before the pilgrims landed at Plymouth, is it likely 
that the Indians paid rent for land ? Give reasons for 
your answer. 

3. It is said that a seed of grain, if planted, will repro- 
duce many of its kind. This is true. Then why is there 
any limit to the amount of grain which can be grown ? Is 
land necessary to the planting? Is suitable land unlim- 
ited ? Mention, if you can, any piece of land you know 
of which you can have for the asjking. 

4. Which lands would you say were the superior lands 
for wheat-growing : those in Massachusetts or those in 
Minnesota and Dakota? Little or no wheat is grown in 
the former, and yet Massachusetts is much nearer Euro- 
pean markets. 

5. If it is cheaper to grow wheat in Dakota than in 
New York and to send it to Europe, can it be said that the 
railways are hostile to the interests of farmers in the West ? 



RENT. 



257 



Is it not also for the interest of the railways that grain 
should be sent to Europe in order that they may have 
freight to carry ? 

6. Why can a land-owner exact rent ? 

7. Why should a tenant be satisfied with merely his 
wages and interest on his capital ? Is a cabinet-maker 
satisfied to get merely this for his table ? 

8. In section 228, after grade four was in cultivation, 
what would happen if a new and large amount of land as 
good as grade one were suddenly discovered, or reclaimed, 
close by ? Would the price fall ? Would it be cheaper to 
grow wheat on grade one than on grade four ? If so, 
would rent fall ? 

9. Why does the '* margin of cultivation " change with 
changes in price ? 

10. If the farmer were to keep the rent, instead of 
paying it to a landlord, would the price of grain be low- 
ered ? What controls the price ? Is grain any lower 
when the farmer is also owner and pays rent to himself ? 

11. Why is it that land becomes more valuable as a 
town grows in size ? 

12. Did the man who owned a farm on which a city 
was built grow rich by producing anything ? Was it his 
work that added value to the land ? 



PART II. 



DESCRIPTIVE POLITICAL ECONOMY. 



CHAPTER XXIII. 

SOCIALISM. 

238. In Part I we have made a statement of the prin- 
ciples of Political Economy ; in Part II we shall discuss 
some applications of these principles to questions of the 
day. There is a great difference between the two parts ; 
as great, in fact, as the difference between the work of the 
chemist and of the physician. The chemist experiments 
in his laboratory with gases and solids, combining and 
analyzing substances, discovering the properties of mat- 
ter ; he discloses, perhaps, the action of an acid or an 
alkali. The physician, on the other hand, takes the re- 
sults of the chemist's work, and, accepting the chemist's 
knowledge of the properties of various drugs and com- 
pounds, attempts an entirely different office : he attends a 
sick man, and he adapts the action of these drugs and 
compounds to the particular and special conditions of this 
individual disease. So, in our present chapters, we are in 
Part II acting as the physician. No longer occupied in 
educing principles, we are now concerned to see how 
social problems and economic questions can be treated 
with these principles. 

We shall find, however, that other than economic con=- 
siderations often enter into our decisions ; for we may 
quite as likely be desirous of finding the means of chang- 
ing some conditions whose causes have been explained by 

our economic principles ; and thus moral or political influ- 

(261) 



262 DESCRIPTIVE POLITICAL ECONOMY. 

ences may be taken into account. It should then be dis- 
tinctly understood that, when we are discussing socialism, 
or free trade, or protection, we are not discussing the 
principles of political economy, but only questions into 
whose solution economic principles enter. The 
principles of political economy could be stated from be- 
ginning to end without ever mentioning the question of 
free trade or protection. The difference between Part I 
and Part II, in brief, is the difference between the study 
of principles and the study of their applications. 

239. Before going further, however, we ought to un- 
derstand what relations the State bears to economic prin- 
ciples. Some say that the State is a fundamental element 
in economic principles ; but we can not admit this. The 
relation of the State to economic laws may be best shown 
by an illustration. If a teacher of physical geography 
were describing a river, he might say that it was a stream 
of water under the force of gravity flowing to the sea in a 
depression of the land ; that it received water from tribu- 
taries which drained a large area about its sources ; that 
when it rained much or when the snow melted, the river 
increased in volume, and by its properties as a river car- 
ried this added water down to the sea according to natu- 
ral laws. But some might think it desirable to build 
dykes to confine the action of the river within certain lim- 
its, or jetties to carry its current in particular directions, or 
even to change its exit to another channel ; and, although 
the course of the river might be changed by the dykes, 
the river with its natural force would remain in existence 
all the same, and would have to be looked out for. If its 
old course were blocked up, a new one would have to be 
found for it, or it would do great damage. In a similar 
way economic principles are related to the State. The 
State is like the dykes which people build, and the 
economic principles are like the river. These prin- 
ciples will go on in their action as expressions of the 



SOCIALISM, 2^1 

causes and effects of things whatever may be done by the 
State. The State may modify the direction and scope of 
their action, and many reasons, political and moral, may 
be adduced to show why it should, but it can not change 
the nature of the principles themselves except by changing 
the conditions which brought them forth. A dyke may be 
a very necessary protection from the river sometimes, and 
so the action of the State may be necessary sometimes in 
order to protect the individual citizen in the enjoyment of 
his freedom and independence. 

240. One of the questions about which many people 
are thinking is whether or not existing industrial conditions 
are right and just to all classes of persons in society. Dis- 
tress and poverty are found next door to luxury and mag- 
nificence. The poor day-laborer jostles the millionaire on 
the street and wonders what reason there is why he works 
all the day long when the other man is luxuriating in leis- 
ure and comfort. As a remedy for this excessive differ- 
ence, perhaps no one panacea is more generally discussed 
than an appeal to the State. Believing that when left to 
individual initiative the condition of the poor is hopeless, 
a class of persons advocate legislation by the State to 
remedy these evils. This system of appealing to the 
State rather than to individual action is socialism. 
The essence of socialism is State-help as opposed to 
self-help. If a man ca,n not get on by himself, the State 
must, they think, do something for him by legislation ; so 
that, whenever laws are passed interfering with industrial 
matters, we say of them that they are socialistic. This 
term may, therefore, apply to many things about which 
there is often little difference of opinion, as when the State 
regulates education, or makes roads, or cares for the in- 
sane ; but it may also apply to the extreme proposals of 
agitators who desire the State to take charge of all the 
food, clothing, materials, machinery, and appliances of 
production, and manage all the industries of the nation 



264 DESCRIPTIVE POLITICAL ECONOMY, 

just as they manage the post-office or the minting of coins. 
It is in this last and extreme sense that people use the word 
socialism to-day, and in that sense we shall discuss it here. 

241. We have in the United States justly heard a great 
deal about political equality ; but recently there has been 
slipped in with it, as if the two were somehow connectec 
the doctrine of industrial equality. Much is now said 
about the right of the poor to a share in the accumulated 
wealth of the rich irrespective of the producing capacity 
of the persons compared. Every one wishes, of course, 
to see an advance in the comfort and well-being of the 
poor ; but we are also obliged to consider whether moral 
justice is satisfied when A, who is a meager producer, 
claims a right to a part of what is produced by B, who is a 
capable producer. As regards their industrial capacities, 
Nature has not made all men equal. The fact that A's 
vote is as good as B's does not make him equal to B in 
the power to produce. 

Still, while acknowledging industrial inequality, those 
who are capable are not freed from a responsibility to 
treat their poorer fellows rightly ; but each man ought to 
be protected by the State in the enjoyment of the result of 
his own exertions. The very fact that men are differently 
constituted for industrial operations makes it evident 
that the State can not possibly treat them in masses, and 
it is equally impossible to treat each citizen individually. 
It is quite out of the range of possibility that the 
State should know the industrial capacities of 
each individual, and so arrange just the right work and 
wages for him. The State has tried in the past to tell the 
citizen what religion he should adopt, but that has been 
abandoned as a false and erroneous policy by most na- 
tions. So it must be in regard to any policy of interfer- 
ence with the individual activities of mankind. They 
must be left to work out an adjustment for themselves un- 
der the general protection of the State. 



SOCIALISM. 265 

242. Socialism, or the reliance on the State for help, 
stands in antagonism to self-help, or the activity of the 
individual. That body of people certainly is the strongest 
and happiest in which each person is thinking for himself, 
is independent, self-respecting, self-conlident, self-con- 
trolled, self-mastered. Whenever a man does a thing for 
himself he values it infinitely more than if it is done for 
him, and he is a better man for having done it. A saves 
f 1,000 and B inherits $1,000. B loses all the discipline of 
character which A gained by going through the process 
of saving ; he values his inherited money less than A does 
his hard-earned money. The man who hews out his own 
path gains power by so doing, and becomes self-reliant, 
sagacious, foresighted, and ready for further advance. 
Such a man knows that he can get nothing except by his 
own exertions, and as a consequence he exerts all his en- 
ergies to accomplish his aim. He knows that two and two 
make four. He does not wait supinely for ^'' something to 
turn up," but puts himself in a position where he needs no 
help. 

If, on the other hand, men constantly hear it said that 
they are oppressed and down-trodden, deprived of their 
own, ground down by the rich, and that the State will set 
all things right for them in due time, what other effect can 
that teaching have on the character and energy of the ig- 
norant than the complete destruction of all self-help ? 
They begin to think that they can have commodities 
which they have not helped to produce. They begin to 
believe that two and two make five. It is for this reason 
that socialistic teaching strikes at the root of indi- 
viduality and independent character, and lowers the 
self-respect of men who ought to be taught self-reliance. 
It is from such teaching that men have been led into the 
delusion of believing that by printing unlimited paper 
money or by coining millions of cheap silver dollars they 
shall somehow become rich. They do not realize that 
19 



266 DESCRIPTIVE POLITICAL ECONOMY. 

every commodity requires labor and capital for its pro- 
duction (section T)^)^ and that there is no other way to 
acquire wealth except by theft or robbery. Self-help leads 
to activity in production and healthy exertion ; State-help 
tends to make all individual energy weak and flabby, be- 
cause it teaches one to rely on an outside power. 

243* When men are left to themselves, it is astonishing 
how much they accomplish by self-help. " Let any one 
propose to himself," says Dr. Whately, " the problem of 
supplying with daily provisions of all kinds a city 
like London, containing about 2,000,000 of inhabitants. 
... A failure in the supply even for a single day might 
produce the most frightful distress. . . . The city is also 
of vast extent — a province covered with houses — and it is 
essential that the supplies should be so distributed as to 
be brought almost to the doors of all the inhabitants. 
Again, the supply of provisions for an army or garrison is 
comparatively uniform in kind ; but here the greatest pos- 
sible variety is required suitable to the wants of the vari- 
ous classes of consumers. . . . Again, and above all, the 
daily supplies of each article must be so nicely adjusted to 
the stock from which it is drawn, to the scanty or abun- 
dant harvest, importation, or other source of supply, to the 
interval which must elapse before a fresh stock can be fur- 
nished, and to the probable abundance of the new supply, 
that as little distress as possible may be felt. . . . 

" Now, let any one consider this problem in all its bear- 
ings, and then reflect on the anxious toil which such a 
task would impose on a board of the most experienced 
and intelligent commissaries, who, after all, could discharge 
their office but very inadequately. Yet this object is ac- 
complished, far better than it could be by any effort of 
human wisdom, through the agency of men who think 
each of nothing beyond his own immediate interest. . . . 

" It is really wonderful to consider with what ease and 
regularity this important end is accomplished, day after 



SOCIALISM. 267 

day and year after year, through the sagacity and vigilance 
of private interest operating on the numerous class of 
wholesale and, more especially, retail dealers. . , . The 
apprehension, on the one hand, of not realizing all the 
profit he might, and, on the other, of having his goods left 
on his hands — these antagonist muscles regulate the ex- 
tent of his dealings and the prices at which he buys and 
sells. An abundant supply causes him to lower his prices, 
and thus enables the public to enjoy that abundance, 
while he is guided only by the apprehension of being un- 
dersold. On the other hand, an actual or apprehended 
scarcity causes him to demand a higher price, or to keep 
back his goods in expectation of a rise. Thus he co- 
operates, unknowingly, in conducting a system 
which no human wisdom directed to that end 
could have conducted so well — the system by which 
this enormous population is fed from day to day." 

244. " The office of the legislator," says Professor 
Bowen,* "is not, by his own superior wisdom, to chalk 
out a path for society to move in, but to remove all casual 
and unnatural impediments from that path which society 
instinctively chooses for itself. Human laws, if wisely 
framed, are seldom mandatory., or such as require an active 
obedience ; they are mostly prohibitory, or designed to pre- 
vent such action on the part of the few as would impede 
or limit the healthful action of the many. ... An indi- 
vidual may not erect a powder manufactory in the midst 
of a populous village, nor carry on any operations there 
which would poison the air with noxious exhalations. His 
neighbors would have a right to call out to him, ' Let m 
alone ; you endanger our lives, and prevent us from pur- 
suing our ordinary occupations in safety.' " 

So that it may be impossible to draw a definite line be^ 
yond which the action of the State can never go. Some 

* "American Political Economy," p. i8. 



268 DESCRIPTIVE POLITICAL ECONOMY. 

action may be healthful ; but that which results in an in- 
terference with private industries will generally be hurt- 
ful. Walking is regarded as a healthful exercise ; but, 
when walking is continued for successive days and nights 
for a week, it may be highly injurious to the bodily sys- 
tem. If the action of the State goes to the extreme of 
interfering with the growth of individual self-help, it is an 
injury. The danger of enervating results flowing from 
dependence on the State for help should cause us to 
restrict the interference of legislation as far as 
possible ; it should be permitted only when there is an 
absolute necessity, and even then it should be undertaken 
with hesitation. We should rather stimulate the individ- 
ual to act for himself — in fact, self-help has been the 
characteristic of the Anglo-Saxon race, and it is intimately 
connected with the origin and success of local self-gov- 
ernment. The right policy is a matter of supreme impor- 
tance, and we should not like to see in our country the 
system of interference as exhibited in the paternal theory 
of government existing in France and Germany. The 
maxim, however, which urges the restriction of State ac- 
tivity should always be followed according to its spirit, 
and not according to its letter. 

245. The socialists of the United States are mostly 
foreigners, and have divers beliefs, but these are com- 
monly derived from the teachings of Carl Marx, Lasalle, 
or Proudhon, the originators of French and German social- 
ism.* They claim that " the means of work are the 
monopoly of the class of capitalists," and that con- 
sequently the laborers become the slaves of capitalists. 
Were the State to take charge of all the capital and to 
employ all the laborers, they think that the ^' iron law of 
wages " would be broken down and labor " emancipated." 

Without capital labor can not be employed, and the 

* See Rae, " Contemporary Socialism," and Ely, " French and 
German Socialism." 



SOCIALISM. 269 

present employment of labor exists only because there are 
reasons for the saving of capital (see Chapter V). Take 
away these reasons by giving the ownership of capital to 
the State, and there would be little or no saving and small 
means of employing labor. But, granting the existence of 
sufficient capital, there is no reason to suppose that the 
State would be able to conduct the processes of production 
with satisfaction to workingmen or to the varying needs 
of consumers (see section 243). The duty of adjusting de- 
mand and supply of goods now requires the best ability 
of the most active industrial managers in this civilized 
age. It is scarcely likely that men, elected to office, act- 
ing not for themselves, but for others, would display this 
extraordinary wisdom. Moreover, after all the difficul- 
ties of production might have been overcome, there would 
still remain the enormous responsibility of fixing upon 
some theory of distribution. Who shall decide how 
much A or B should have as wages ? Shall each man 
have an equal share whether he is lazy or skillful ? These 
are insuperable objections to any scheme of State control 
of labor and capital. " It must be acknowledged," says 
Mr. Mill,"^ a well-known friend of workingmen, and one in- 
clined toward certain forms of socialism, " that those who 
would play this game [of State socialism] on the strength of 
their own private opinion, unconfirmed, as yet, by any ex- 
perimental verification, must have a serene confidence in 
their own wisdom on the one hand, and a recklessness of 
people's sufferings on the other, which Robespierre and 
St. Just, hitherto the typical instances of those united at- 
tributes, scarcely came up to." 

246. Other forms t of socialism have been tried 
which differ widely from State socialism. Such, for exam- 
ple, are the societies (existing within a State, and under its 

* Chapters on Socialism, " Fortnightly Review," 1879. 

f See Mill's " Political Economy" (Laughlin's ed.), pp. 165-171. 



2/0 



DESCRIPTIVE POLITICAL ECONOMY, 



protection) established by St. Simon and Fourier in France, 
or those of the Economites in Pennsylvania, the Zoarites 
in Ohio, the Shakers, or the well-known experiment at 
Brook Farm in Massachusetts some years ago. In many 
of them the property is held in common by all the mem- 
bers, although some retain private property. While every 
member of the community is provided for by a minimum 
allowance, as in Fourierism, the produce is generally dis- 
tributed in some way so that the more capable get more 
than the less capable. The great difficulty with these 
schemes has generally been in adapting each person's 
work to his capacity, and assigning a remuneration justly 
corresponding to his merits. There can be no objection 
whatever to permitting the trial of these experiments, be- 
cause people go into them of their own free will. It is 
far otherwise with State socialism, where there would 
always be a large class of persons who would be forced 
into the experiment against their will. 



CHAPTER XXIV. 



TAXATION. 



247. When men form a State, they hand over to cer- 
tain selected persons the duty of protecting life and prop- 
erty, and caring for the best interests of the citizens. 
In the United States we put this national power into 
the hands of Congress, the President, and the Courts. 
Whether it is intended that they should interfere much 
or little with the industries of our citizens, it is neces- 
sary, in either case, that the State should be provided 
with a revenue from which the expenses of carrying on 
the Government can be defrayed. For the years 1886 
and 1895, the United States had the following expenses 
to meet : 

[In millions and tenths of millions.] 



Expenditures of United States. 



Civil Expenses (including foreign inter- 
course, public buildings, District of 
Columbia, etc.) 

Indians 

Pensions 

War Department 

Navy Department 

Interest on the Public Debt 

For Sinking Fund 



Total. 



5287.0 



$74.2 


$101.9 


6.1 


10.3 


63-4 


141. 2 


34-3 • 


54-6 


13-9 


31.7 


50.6 


27.8 


44.5 





$367.5 



It is manifest, therefore, that a State has many expenses 

to meet, and that taxes should exist in order to raise the 

money necessary to cover these expenses. 

(271) 



272 DESCRIPTIVE POLITICAL ECONOMY. 

Besides paying taxes to the United States, the peo- 
ple are also obliged to pay something to the State, to 
the county, and to the city or town in which they live. 
Thus a resident of New York city helps to pay taxes, 
among other things, for the maintenance of Congress, the 
President, and the United States courts ; he also pays 
taxes to allow New York State to conduct its own affairs 
with a governor, a legislature, and State courts ; taxes 
to provide for county expenses ; and hnally he pays taxes 
to maintain a city government, comprising a mayor and 
aldermen, with expenses for water-works, street-cleaning, 
fire-engines, etc. In all these cases, of course, a revenue 
is necessary ; and this revenue is obtained by taking some 
part of the wealth of each person for the use of the Gov- 
ernment. The whole object of taxation, therefore, 
is to provide the means for defraying the proper 
expenses of the Government, whether it be the na- 
tional, state, county, or town government. 

248. In taking a part of each man's property, the State 
deals with delicate matters, and should be obliged to con- 
sider its action carefully. When persons work and toil 
for the wealth they own, they will not consent to part 
with it except for good reasons ; and they may justly de- 
mand that Governments should follow certain well-ac- 
cepted rules which experience and justice have found to 
be necessary, (i) Each man should be taxed in propor- 
tion * to his ability to pay, and the tax ought not to 
change the relative standing of men in the community. 
This is what is meant by saying that the tax should be 
equal ; for, of course, the State should act impartially 
with all of its citizens. Then (2) the amount to be paid 
in taxes ought to be certain and definite, and ought 
not to be changed arbitrarily ; for if producerc know be- 

* I shall not, of course, discuss in an elementary treatise the vari- 
ous theories by which equality is best realized, nor the principles ac- 
cording to which equality is tested. 



, TAXATION. 273 

fotehand just how much the tax will be they can arrange 
their business accordingly. Even a very high tax can be 
paid, provided it is certain and not fluctuating. (3) The 
State will also do well to collect the tax when it is 
most convenient for the tax-payer. When a person 
is about to buy an article of luxury, he can be best taxed 
in the form of an increased price ; for, if he does not want 
to pay the tax, he need not buy the luxury. And (4), 
finally, the Government ought not to levy a tax, which is 
intended to pay the expenses of Government, in such a 
way that any considerable part of that which is taken from 
the tax-pa3'-er does not go to the State. Apart from the 
smallest necessary expenses for collecting the tax, the 
whole amount should go to the Government, and 
not to persons who have no right, such as the state has, to 
take property from citizens. 

249. Most writers on taxation distinguish between di- 
rect and indirect taxes. Direct taxes are those which 
are levied on the very persons who it is intended or de- 
sired should pay them, and which they can not put off 
upon others by raising the prices of the taxed article. 
The best example of a direct tax is one on a man's 
income ; others are poll-taxes, licenses, taxes on horses 
and carriages, on books and furniture, on dogs, and on 
houses (if levied on the occupier). Some one, for exam- 
ple, is obliged to pay a dog-tax ; he can not arrange it so 
that another person shall pay it. He may escape it only 
by giving up the dog ; but, if he keeps the dog, he can not 
throw the tax on any one else. Indirect taxes, on the 
other hand, are those which are levied on persons who ex- 
pect to get back the amount of the tax by raising the 
price of the taxed article. A good example of an indirect 
tax is one on the importation or manufacture of com- 
modities. When an importer pays $1 for a yard of silk 
in France and brings it to the United States, where he is 
obliged to pay a tax of 60 cents on importing it, he adds 



2/4 



DESCRIPTIVE POLITICAL^ ECONOMY. 



the tax to the purchase-price, and charges his customers 
as much as $i.6o a yard, if not more ; in this way he 
throws the tax on the consumer. Other instances of in- 
direct taxes in the United States are internal-revenue 
duties on the manufacture of tobacco and spirituous 
liquors. The price of these articles is raised, if the pro- 
ducers pay a tax on them ; and so the consumers really 
pay the tax to the Government in the higher price they 
pay to the producers of the articles. 

250. During our civil war (i 861-1865) a very great 
change was made in our taxes, as can be seen by refer- 
ence to Chart VII, which shows the fluctuations in the 
sources of national revenue. During that time the Gov- 
ernment was very anxious to raise money to pay the war 
expenses, and so resorted to every possible means of taxa- 
tion. As one of the forms of direct taxes, they tried the 
income-tax ; and, although it has been given up by the 
national Government, this tax is still used in some States. 
It is a kind of tax which in theory is excellent, but in 
practice is unjust. In favor of it, it is to be said that, if 
we are to tax men in proportion to their ability to pay, a 
man's income indicates very fairly this ability. Incomes, 
however, below a certain amount should remain altogether 
untaxed. This exemption is $2,000 in Massachusetts, 
and only incomes above that sum are taxed. So that an 
income of $2,500 is taxed on only $500. Again, saving 
from an income ought not to be discouraged, and, if it 
could be justly arranged, a man ought to be exempt from 
taxation on all that part of his income which he has saved. 
With all these exceptions, the income-tax would be as 
good as any tax which could be imposed. But, on the 
other hand, there is an overwhelming objection to it. In 
practice, no reasonable means exist of finding out what a 
man's income is; only the conscientious and honest will 
report their income exactly, while, in order to escape pay- 
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TAXATION, 



275 



the tax falls only on the conscientious, while the uncon- 
scientious escape. This makes it an unequal tax, falling 
on some and not on others ; and for that reason it is a very 
objectionable one. In practice the income-tax is not 
fair. It has also been questioned whether Congress has 
a constitutional right to impose an income-tax for na- 
tional purposes. 

251. In this country the national revenue is practi- 
cally all raised by indirect taxation on commodities ; so 
that it is scarcely known that taxes are being paid. It re- 
mains true, all the same, that we pay taxes in the in- 
creased prices of the goods we buy. But the taxation 
which, in practice, most people regard as onerous, is that 
levied for state, county, and municipal purposes. 
This is chiefly in the form of direct taxes on real estate, 
on personal property, carriages and horses, or income. 
Here there is no little difficulty. Apart from the amount 
collected, which is very high, owing to municipal extrava- 
gance, it is found that persons having personal property 
escape, while those having real estate do not. Personal 
property is in the form of bonds, stocks, mortgages, or 
notes. Here, as in the case of the income-tax, the tax 
on personal property is unjust, simply because it falls 
unequally ; the honest and conscientious make a full re- 
turn of their personal property, and are taxed according- 
ly, while those who conceal this kind of property escape 
altogether. Consequently it is sometimes proposed to 
abolish the tax on personal property on the ground of its 
unfairness. This tax, however, is likely to remain, be- 
cause the amounts received from it are large, although it 
falls unevenly, and the towns can not well get on without 
it.* 

* A perfectly fair tax, and one which would yield considerable 
revenue, is that on bequests. The heir in receiving a bequest receives 
that v/hich was the result of another's exertion, and the State is war- 
ranted in taking a sum out of this by taxation. The heir then comes 



2/6 DESCRIPTIVE POLITICAL ECONOMY, 

252. When we come to consider indirect taxes, or 
those imposed on commodities, so that the person who 
pays the tax can raise the price of the commodities, and 
thus force the purchaser to pay him back the tax, there 
are some general remarks to be made as to the kind of 
articles which it is best to tax. (i) In the first place, 
taxes should never be levied on the necessaries 
of life, or on the materials or instruments employed in 
producing these necessaries. The reason of this is very 
plain ; for the poor ought not to be taxed on the neces- 
saries of life when there are so many other things used by 
the well-to-do which can be taxed. Necessaries of life 
should be excluded for the same reason that an exemption 
should be made of small incomes under an income-tax. 
On the other hand (2), articles which have most con- 
nection with vanity, such as expensive jewelry, dia- 
monds and lace, or horses and carriages,* ought to be 
taxed as much as is expedient. If people are obliged to 
give up such articles by reason of the tax, there is no 
harm done. (3) A tax on a commodity should be levied 
on the consumer and not on the producer of it; 
because, if levied on the producer, he will raise the price, 
not merely by the amount of the tax, but by much more 
than the tax. He will want interest on the additional 
capital required for paying the tax, because there will be 
more for him to risk. The person who buys the articles 
will thus be paying a tax to the State, and also a tax to the 
producer, which violates that one of the canons of taxa- 

to regard the bequest in the beginning as less by the amount of the 
tax, and there is not the same feeling as when taxes are taken out 
of one's acquix-ed property in which an unquestioned right of prop- 
erty exists. 

* Some regard should be paid for cases where a horse is used as a 
means of income, and not for luxury or pleasure. A drayman's horse 
ought not to be taxed the same as a horse used by some one for pleas- 
ure purposes. 



TAXATION. 277 

tion (section 248) which requires that the tax should be 
levied solely for the State. (4) Among luxuries, articles 
used as stimulants may be properly selected for taxa- 
tion. For, if any article of luxury is to be chosen, a 
tax on that which causes evil and misery is better than 
that on another which does not entail similar conse- 
quences. (5) Bat care should be taken that the tax is 
not so high as to cause evasion ; for in that case the reve- 
nue will be less than if the tax were lower and if it were 
generally paid. There is a rate of duty for a commodity 
which is known as " the revenue point," at which the 
State can get the largest revenue. If the tax is lowered 
just to the point where it permits the largest possible 
amount of the commodity to be consumed, the large 
amount of the article on which the tax is paid will pro- 
duce a larger revenue than if the tax were higher and paid 
on a less amount. Just where this point is, the financier 
can find out only by careful trial. 

253. In taxing a commodity in order to obtain the 
largest revenue with the least burden on the people, the 
tax should not be imposed on only one of two methods of 
obtaining it. If this is done, it constitutes a discrimi- 
nating tax. When left to themselves, men will natu- 
rally adopt that one of two methods which produces the 
best article at the lowest price. If the United States 
were to tax cane-sugar and not beet-sugar, and if cane- 
sugar alone had been produced before, this would create 
a necessity for employing what producers, by their former 
action, admitted to be the inferior method of getting 
sugar — that is, from beets. This action would render the 
sugar either poorer in quality or more expensive ; and the 
additional labor and capital required would be wasted 
" as uselessly as if it were spent in hiring men to dig 
holes and fill them up again." The sugar-makers would 
raise their price enough to cover this waste to them, and 
the people who buy sugar would really pay for the waste. 



2/8 DESCRIPTIVE POLITICAL ECONOMY, 

This violates the rule that taxes should take as little as 
possible from the tax-payer beyond the amount covered 
into the treasury of the State ; and, in proportion as sugar 
should be no longer produced from the cane, the State 
would lose its revenue, for the tax was to be levied only 
on the cane-sugar. 

254. As the United States provides its revenue almost 
entirely by means of indirect taxes, people seldom realize 
that they are paying taxes to the United States out of the 
price of a blanket or of a pound of sugar. The state, 
county, and municipal taxes, on the other hand, are gen- 
erally direct, and these are the taxes which people feel the 
most ; for the money, after all, which a man pays out di- 
rectly as taxes is generally the only money which he be- 
lieves he is paying as taxes. With indirect taxation it is 
different. We can see from the following Treasury 
statement of the income of the United States, 
for the years 1886 and 1895, how large a sum is collected 
from taxes on commodities : 



Receipts of United States 

Customs 

Internal Revenue. , . 

Sales of Public Lands 

Taxes on National Banks 

Profits on Coinage, etc 

Consular Fees, etc 

Miscellaneous ... 

Total 



1886. 


$192.9 


116 


8 


5 


6 


2 


7 


5 


9 


3 


4 


9 


I 


$336 


4 



1895. 



5I3I.8 
147. 1 

1-7 
1.6 

2.8 
12.7 



$297.7 



Customs are taxes levied on goods when imported into 
the country ; the internal-revenue duties are taxes on to- 
bacco and spirituous liquors produced within the United 
States ; so that both customs duties and internal-revenue 
taxes are indirect. The latter, being taxes upon stimu- 
lants or luxuries, are a highly proper means of raising a 
revenue. These sources of taxation in past years are to 
be readily seen in Chart VIII. 



TAX A TION. 



279 



255* The customs duties levied on goods imported 
from foreign countries yield the largest part of our reve- 
nue. They are not laid in such a way as to bring in the 
largest revenue, and nothing has been done to find the 
" revenue point," chiefly because the duties are believed by 
some to exist for other reasons than for providing an in- 
come. But, in order that we may see for ourselves, let us 
collect together in groups the articles on which im- 
port taxes are levied, and see what commodities are 
taxed by the United States. Then we can better judge 
whether or not our national system conforms to the gen- 
eral principles of taxation already stated. In one column 
is given the value of the goods, and in the other is given the 
amount of the tax which is levied on the given value. This 
table is taken from the United States Statistical Abstract 
(sums are given in millions and tenths of milHons) : 





1885. 


1895. 


Leading articles which pay import duties. 


Values. 


Duty 
collected. 


Values. 


Duty 
collected. 


Sugar, confectionery, and molasses. 

Wool, and manufactures of 

Qillr Tnarmfartnrps of 


$73-5 
45.6 
28.1 
34-0 
27.2 
9.1 
32.7 
9-3 
II. 7 

6.4 
13.0 
10.3 

4.8 

6.1 

6.6 

68.3 


$52.1 

27-5 
14.0 
12.0 
10.9 

7.4 
9.1 

7-1 
3.8 
3.7 
3.7 
2.9 

2.7 

.6 

1.0 

19.6 


$39.2 
37-0 
31.0 
24.0 
33-6 

13.7 
20.9 
10.9 
13.2 

5.9 
II. 7 

13.8 
9.2 

7-3 

1.6 

81.2 


$15.6 
29.9 
14.7 


Iron and steel, and manufactures of 

Cotton, manufactures of . . . . 

Tobacco, and manufactures of 

Flax, hemp, jute, etc., and m'f'resof 
Liquors (malt, distilled spirits, wines) 
Chemicals, drugs, dyes, and medicines 

Glass, and manufactures of 

Fruits including nuts 


II. 6 

15-7 
14.9 

7-2 

6.9 
4.0 

3-1 

2.7 


Leather, and manufactures of 

Earthen, stone, and china ware 

Jewelry and precious stones 

Breadstuffs • . 


3.6 

3-2 

1. 1 

•4 


All other dutiable articles 


14.8 


Total dutiable merchandise 


$386.7 


$178.1 


$354-2 


$149.4 


Per cent, of duties on values. . . 




45-86 




41.75 



From this official account we see that taxable articles 
to the value of $386,700,000 were imported, and that on 



28o DESCRIPTIVE POLITICAL ECONOMY. 

these the United States collected taxes to the sum of 
$177,300,000; or, in other words, the United States col- 
lects as taxes, under present laws, about 45 per cent of 
the value of the goods imported. And to this extent are 
the taxed articles necessarily increased in price to the 
people of this country. 

256. In considering whether such a system of taxation 
is a good one or not, we should apply to it the general rules 
previously stated. First, we find that in our system many 
necessaries of life are taxed : such as clothing, blankets, 
flannels, iron, cotton goods, flax, hemp, drugs and medi- 
cines, glass, leather, and earthenware. The bulk of the 
taxes are not on articles of vanity ; and the duties are so 
high as to keep out foreign goods to a considerable extent. 
Just so far as taxes keep goods from being imported do 
they lessen the revenue which might be obtained by lower 
duties. Then, also, many of the taxes are discriminating ; 
that is, one method of getting an article, importation, is 
taxed, while another method of getting it, by home pro- 
duction, is untaxed. This obliges the country to get its 
goods by the more costly method, or home production (see 
section 253). To illustrate this point, suppose that the 
United States has need of 10,000,000 tons of steel, and 
that she produces at home 6,000,000 tons and imports the 
remaining 4,000,000 tons. If a duty of fro a ton is levied 
on imported steel, the price at home must be as much as 
the price abroad and $10 more, or else none would be im- 
ported. The price in the United States of the steel made 
here will bear the same price as that which is imported. 
The Government will get the $10 a ton on 4,000,000 tons 
imported, or $40,000,000 ; but the 6,000,000 tons produced 
here will also bring the same price, of which $to on each 
ton is paid by purchasers as a tax, but not to the Gov- 
ernment. The $60,000,000 is paid by the consumer to 
the producer, not to the United States ; for the United 
States receives only the $10 on the imported steel. If the 



TAXATION. 281 

home price is kept up by the duty, and if imports still 
come in, the one method of getting the article is encour- 
aged at the expense of the other, and the consumer pays 
a large tax to those who produce the goods and not to the 
Government. In the chapter on Protection and Free 
Trade we shall discuss whether there are advantages to 
compensate for this large payment by one set of private 
persons to another. Here we are discussing solely the 
means of raising an income by taxation, and how to do 
this most effectively. 



CHAPTER XXV. 

THE NATIONAL DEBT. 

257' When the American colonies became a united 
nation in 1789, the country was suffering from the distress 
caused by the War of the Revolution, and especially by 
the ruinous issue of irredeemable paper money. The 
young nation was sunk deep in financial difficulties, and 
it had no adequate income. Taxes were at once laid, 
chiefly on imports, in order to meet this need ; but the 
income was insufficient to pay off the debts previously in- 
curred to carry on the Revolutionary War. Money had 
been borrowed from France and Holland ; and on Janu- 
ary I, 1790, the outstanding debt of the United States, 
including the debts of the several States assumed by the 
General Government, amounted to $71,000,000. It was a 
very heavy burden at the time, and, as can be seen by 
Chart VIII, it rather increased than diminished for a 
while. 

258. The national debt was thus first caused by the 
war of the Revolution. It dates from 1789, but it was 
afterward greatly increased by two other wars. Under 
the skillful management of Mr. Gallatin, it had declined 
somewhat before the War of l8l2 ; but the struggle with 
England raised it again, and it reached a point higher 
than any known before 1862. The national revenues, 
which grew with the country, paid off the entire amount 

by 1835, and for a few years the debt was but a few thou- 

(282) 



Ch.art VIII. 



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AFTER 1868 THE AMOUNTS INCLUDE ACCRUED INTEREST, 




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1781 

1795 

1800 
1805 
1810 
1815 
1820 
1826 
1830 
1835 
1840 
1845 
I860 
I8C55 
I860 
1865 
1870 
1875 
1880 
1885 
1890 
1895 



THE NATIONAL DEBT. 283 

sand dollars. The Mexican War caused another in- 
crease before 1850, but even that was slowly reduced, and 
at the time of the outbreak of the Civil War the national 
debt was very small indeed in comparison with its size 
since. 

259. On the breaking out of the Civil War in i860, 
the Government committed the error of supposing that the 
struggle would be a short one. The expenses of the first 
year were estimated at $300,000,000, while the revenue 
was only $56,000,000 (see Chart VII). The people ex- 
pected to be taxed heavily at once to make up the dif- 
ference, but the timidity of the Government led to 
borrowing instead of taxing. In July, 1861, Congress 
authorized the Secretary of the Treasury to borrow $250,- 
000,000; in February, 1862, $500,000,000; in March, 
1863, $900,000,000 ; in June, 1864, $400,000,000 ; in 
March, 1865, $600,000,000 ; and in addition other acts 
were passed to permit borrowing in different ways. Of 
course, the Government was not always able to borrow 
when it gave authority thus to the Secretary of the Treas- 
ury to ask for money. Its credit varied, and it had to 
offer various kinds of inducements. The war became a 
long, costly, and doubtful struggle, and, because taxation 
had not been at once undertaken, borrowing had to be 
resorted to to an unfortunate extent. 

260. When people loan their wealth to the State, they 
get in return something which is a claim, or evidence, for 
thie amount. This claim appears in various forms. 
When borrowing for a number of years, the Government 
usually gives a bond, in which it agrees to pay back the 
principal at a stated time, paying, meanwhile, a certain 
rate of interest. Attached to each bond are a number of 
" coupons " (French, couper, to cut), one for each payment 
of interest until the bond falls due. The owner of the 
bond can cut off a coupon semi-annually or quarterly, 
and present it to the Government to be cashed, and thus 



284 DESCRIPTIVE POLITICAL ECONOMY, 

get his interest. A bond is said to be " registered " when 
the owner's name and the number of the bond are regis- 
tered on the books of the United States Treasury. If such 
a bond is lost or burned up, the owner can still get his prin- 
cipal and interest. If an unregistered bond is burned up, 
its owner loses it, just as if an equal value of bank-notes 
were burned up. Some bonds were known according to 
the time they ran. A " five-twenty " bond was one which 
the United States could pay off in five years, but was not 
obliged to pay before twenty years ; a "ten- forty" bond 
was one redeemable in not less than ten nor more than 
forty years. Besides bonds, the United States issued vari- 
ous forms of noteS) or promises to pay at a short time in 
the future. A " seven-thirty " note was one on which in- 
terest at 7.30 per cent was paid, although it was paya- 
ble in at least three years. Of the United States notes, 
or " green-backs," we shall speak in Chapter XXVIII. 
When the Treasury had no other funds, it was also al- 
lowed to give its creditors certificates that the United 
States was indebted to them for given amounts ; and 
these " certificates of indebtedness " ran for only a year, 
bearing interest. It sometimes happened that the United 
States Treasury was nearly empty, and was obliged to re- 
sort to all kinds of devices in order to meet its expenses 
during the war. 

261. It was not until 1864 that any large sums were 
obtained by taxation, and yet to that time the daily ex- 
penses of the Government had been enormous. In fact, 
it was not until the year 1866 (see Chart VIII) that the 
Government received its largest war revenues. Resort 
was consequently had to every device for borrowing. 
Thus, the United States borrowed money by offering the 
different kinds of obligations described in the last section, 
and in October, 1865, after the close of the struggle, the 
national debt stood in the following form, expressed in 
millions : 



THE NATIONAL DEBT. 285 



Bonds : 




tf^j 


Twenty-year bonds of 186 1, 6 


per cent 


265 


Five-twenty " " 6 


t( 


660 


Ten-forty " " 5 


(( 


173 


Notes : * 






Seven-thirty notes. 7.30 


({ 


830 


Compound-interest notes. . . 6 


(( 


173 


Legal-tender Treasury notes 5 


<< 


32 


U. S. notes (" greenbacks ") — 


<( 


428 


Fractional notes — 


(< 


26 


Temporary deposits 4, 5, 6 


« 


99 


Certificates of indebtedness 6 


(( 


56 



$1,163 



— 1,644 

$2,807 

The " United States notes " were promises to pay on de- 
mand, and were a legal tender, but bore no interest ; 
while the " legal-tender Treasury notes " were issued for 
terms of not more than three years, and bore interest at 
the rate of 5 per cent. The " fractional notes " were 
the paper notes ("shin-plasters") for parts of a dollar, 
issued to supply the absence of subsidiary silver coins. 
" Temporary deposits " were received by the Government, 
and were payable to the depositor after ten days* notice. 
They gave the United States the use of capital while it 
was waiting for investment. 

262. The doubt which had attended the success of 
our armies and of our finances affected the credit of the 
Government. The United States was not able to borrow 
sometimes at a rate as high as 12 or 15 per cent ; and the 
six-per-cent bonds were at some periods given in return foi 
depreciated paper, worth in gold only 40 or 50 cents. 
Thus the annual interest to be paid on our debt after the 
war was very onerous, amounting in 1867 to $143,000,000. 
By the end of the war the United States had begun to 

* In J. J. Knox's " United States Notes " are given cuts with the 
wording on the various kinds of notes. 



286 " DESCRIPTIVE POLITICAL ECONOMY. 

tax heavily, as may be seen in the increasing revenues in 
Chart VII, and, when the war expenses ceased, the income 
was considerably greater than the expenditure. Thus 
the surplus revenue was available to pay off some of the 
debt. As the resources of the country in paying heavy 
taxes thus became manifest, and as the debt was manfully 
reduced little by little, our credit improved ; and, when 
some parts of the debt fell due, the Government was able 
to borrow money at lower rates of interest, replacing the 
old debt with new but less burdensome forms of debt. It 
was, therefore, a great advantage that many bonds were is- 
sued in the form of the " five-twenties," for when our credit 
improved it was possible, after five years from the date of 
their issue, to pay them off and put other bonds in their 
place bearing 5, or 4!^, or 4 per cent interest. This change 
in the debt is called " refunding." Beginning with 1870, 
the war bonds were almost entirely changed into those 
bearing lower rates of interest ; so that, by refunding and by 
paying off the principal, the annual payment for interest 
has fallen from $143,000,000 in 1867 to $50,000,000 in 1886. 
263. As the result of the various refunding measures, 
and of a steady payment of the debt with the surplus 
revenue, the main items of the public debt on May i, 
1896, were as follows, expressed in millions : 

4i per cent bonds of 1891, continued at 2 per cent. $25.4 

4 per cent bonds, payable in 1907 559-6 

Loan of 1904, at 5 per cent 100. o 

Loan of 1925, at 4 percent 157-3 

Total interest-bearing debt 842 . 3 

Non-interest-bearing debt (incl. U. S. notes, " green- 
backs," $346. 7) 374-4 

Debt matured 1.6 

Total debt 1,218.3 

Less net cash balance in Treasury 270. 1 

Net debt, May i, 1896 '$948 . 2 

The debt is thus about one third of what it was in 1865, 
and the annual interest has fallen to about one fifth of 



THE NATIONAL DEBT. 287 

its greatest figure. The internal-revenue taxes have been 
reduced, but the customs duties on imported goods are 
still, on the whole, as high as during the war period (see 
section 255). The reduction of the debt during the period 
since 1891 has ceased ; and even a slight increase has 
taken place, caused by the sale of bonds to replenish the 
gold reserve. 

264. By noticing the dates at which the various bonds 
fall due, it will be seen that, when the war bonds were re- 
funded, the Treasury sacrificed a very important advan- 
tage in order to secure a low rate of interest. It was a 
fortunate thing that so many bonds had formerly been 
issued like the "five-twenties," so that, when better days 
came, advantage could be taken of the privilege of redeem- 
ing them after the five years had passed. In refunding, 
the later bonds were made redeemable only after 
a long period. The few three-per-cent bonds are now 
all paid off, and the four-and-a-half-per-cent bonds do 
not mature before 1891, while the large amount of four- 
per-cent bonds can not be reached before 1907. The 
United States can not redeem the bonds at four per cent 
or four and a half per cent ; and, unless they buy them at 
the existing price, which is much above par, there will be 
no means of expending the large surplus, which still exists 
because a system of taxation intended for war emergen- 
cies is continued. The surplus can, however, be used in 
paying off the United States notes. The existence of a 
large surplus revenue which can not be used readily to 
pay off the debt is an unfortunate temptation to useless 
and extravagant expenditure. The only rational step to 
take is to reduce taxation ; and, as the internal-revenue 
taxes on spirituous liquors and tobacco fulfill all the re- 
quirements of good taxes (see section 252), they ought to 
be retained ; and, because some of the customs duties are 
laid on necessaries of life, they should be reduced in such 
a way as to lessen the revenue, and at the same time 



288 DESCRIPTIVE POLITICAL ECONOMY. 

to cheapen those articles to the advantage of the poorer 
classes. This can be done by putting them on the free 
list. 

265. While the debt of the United States has been re- 
duced to about two thirds since 1865, in most countries in 
the world the national debts are increasing. Russia has 
a very large debt ; the debts of France, Spain, and Austria 
are increasing ; and Great Britain reduces her debt in only 
small amounts. The amounts of the public debts of the 
principal countries are shown in the following table, in 
millions,* The debt of the United States is thus seen to 
be less than that of France, Great Britain, Austria-Hun- 
gary, Russia, Italy, and Spain. 

Nominal capital 
States. of debt, 1894. 

France $5,908 

Great Britain 3, 265 

Austria-Hungary 3, 129 

Russia 2,586 

Italy . 2,274 

Spain 1,377 

Turkey 737 

Brazil 681 

Portugal 568 

Egypt 522 

Belgium 446 

German Empire 299 

Canada 295 

* A. Neymarck, " Les dettes publiques. Europeennes," p. 89. 



CHAPTER XXVI. 

FREE TRADE AND PROTECTION. 

266. Protection to home industries has for its object 
the employment of labor and capital within a country in 
the production of commodities which would otherwise be 
imported from abroad. The " protection " is obtained 
by levying a duty on goods when they are brought into 
the country. This tends to keep them out, and, if it does 
not keep them out, it is necessary for the importer to 
charge a price so high that the same goods can then be 
produced by home producers at a profit. Protectionists 
argue that each country should form an independent, self- 
sustaining unit, able to produce everything which it con- 
sumes. They appeal to the national feeling in man 
which sets his own country above every other. They feel 
that legislation and the powers of the State should be used 
to encourage manufactures at home, believing that when 
goods are imported from abroad a country thereby en- 
courages foreign, and discourages home, industry. If any 
economic losses result from restricting international ex^ 
change, they argue that these are fully compensated for, 
or even outweighed, by the moral and political gains of 
protection. 

267. Free-traders, on the other hand, urge that by 
division of labor more can be produced than is possible 
when each man tries to produce everything he consumes ; 

and they claim that all exchange is based on this principle. 

(289) 



290 DESCRIPTIVE POLITICAL ECONOMY. 

One man produces shoes and buys bread, because he can 
produce more wealth in the form of shoes than in any 
other way, and thus has more purchasing power to buy 
bread. So he satisfies his wants by producing the particu- 
lar thing which satisfies the desires of many other men, 
and who exchange what they produce for his shoes (see 
sections 80 and 90). People when left to themselves ex- 
change goods because they benefit from it. No one would 
think of forbidding the exchange of wheat for cloth in 
Ohio, and, since the exchange of goods between two coun- 
tries goes on for exactly the same reasons as between two 
persons within the same country (see section 89), free- 
traders do not see why international exchange should be 
interfered with by the State. They assert that by inter- 
national trade some goods can be got at a less expenditure 
of labor and capital than when they are produced at home. 
Referring to the trade stated in section 89, they say that, 
if there were free trade, the United States might get 100 
bushels of wheat and 25 yards of silk by 200 days' labor 
(in growing wheat), and France might get the 100 bush- 
els of wheat and 25 yards of silk by 180 days' labor (in 
making silk). While, if free exchange were prevented, 
and each country produced both commodities at home, 
the wheat and silk would cost the United States 220 days* 
labor, and France 210 days* labor. Under free exchange, 
both countries together supplied themselves by 380 (200 -I- 
180) days* labor ; while, under protection, they got ex- 
actly the same articles by 430 (220 -I- 210) days' labor. 
By protection the two countries spent 50 days' labor un- 
necessarily, which by free exchange might have been used 
to produce additional wealth to be divided between labor 
and capital. Thus free-traders stand upon the ground of 
benefits to both countries arising from a larger production 
of wealth. Foreign exchange, they urge, is only an exten- 
sion of the principle of division of labor. 

;268, Protectionists argue that^ when a foreign country 



FREE TRADE AND PROTECTION. 



291 



can sell goods to us cheaper than we can make them, a 
customs duty should be put on in order to prevent for- 
eign competition. By manufacturing goods within 
the United States, they argue that wages of American 
laborers are kept at a higher level, and also that more 
laborers can find employment, than if the goods were 
bought abroad. If any industry in the United States 
should cease to exist because of the withdrawal of pro- 
tection, they say that it would be a great misfortune 
to both capital and labor. The laborers would be 
thrown out of employment, and the capital could not 
find satisfactory investment. Every industry, therefore, 
which feels the influence of foreign competition should 
receive attention from Congress, and be protected by 
sufficiently high duties to keep the foreigners from un- 
derselling. 

269. The free-traders, on the other hand, say that, in 
order to participate in the gains of international trade, it 
is absolutely necessary that foreign goods of some 
kind should be imported. Unless foreign countries 
send us the goods in the production of which they possess 
a relative advantage, and we send them goods in which we 
have a relative advantage, there can be no gain in interna- 
tional exchange, and the world will get its goods with more 
exertion and cost than is really necessary. They point 
out, too, that goods are really exchanged for goods, and 
that money is only a convenient medium for the purpose. 
The imported goods are not offered us for nothing : goods 
which foreigners want are given to them in exchange. If 
a home industry ceased to exist because protection had 
been withdrawn from it, and if we thereby imported the 
articles from abroad, free-traders would say that it would 
be necessary to produce goods to give for the new imports, 
and consequently the displaced labor and capital would 
find just as much employment as before. If we 
could not produce any thing foreigners wanted, they would 



292 



DESCRIPTIVE POLITICAL ECONOMY. 



not send us the imports ; and then the old industry could 
go on as before. 

To the claim that the laborers would not find employ- 
ment if some protected industries ceased to exist, free- 
traders reply that hundreds of millions of home and for- 
eign capital are being constantly invested in the United 
States ; and it can not be said that we have as yet reached 
the stationary state when interest on capital has no exist- 
ence. So long as capital can find an investment, of course 
laborers can be employed, since production can not go on 
without labor. And, as will be seen later (section 274), 
free-traders believe that the new industries taken up will 
be more productive than the old ones abandoned, and that 
wages and interest for labor and capital will be larger. 

270. Protectionists assert that industries can not be 
established in a new country in the teeth of foreign com- 
petition, and that infant industries should be protected 
until they can get on their feet and go alone. Protection 
is like the scaffolding around a building — only necessary 
for its erection, and to be taken down when the building 
is finished. It is claimed that, in many instances, indus- 
tries in the United States have been ruined by foreigners 
who have temporarily lowered prices until the home mar- 
ket was entirely in their control, and then raised them 
again ; so that a tariff which keeps out foreign goods 
allows the young industries to get a foothold. 

To this it is replied that no case has ever been known 
where industries OHce protected have been willing to have 
the tariff reduced on the ground that they could go on 
alone ; that, because of leaning on the protection of the 
State, they do not exert themselves to produce as efficiently 
as they might when exposed to free competition ; that, in 
the history of the tariff of the United States, it is shown 
that the cotton, woolen, and iron industries had got well 
started with little or no aid from protection, but that only 
when industries became strong and influential were manu- 



FREE TRADE AND PROTECTION. 



293 



facturers able to control legislation in their favor. Unless 
the industry shall be able to establish itself, it is said, it 
ought not to be established by the State, any more than 
the State should require people to employ a young lawyer 
or doctor who had not yet been able to secure clients or 
patients. It is further added that the protected lawyer or 
doctor will never think he has a large enough practice to be 
willing to give up the State aid by which he is helped. On 
this ground, it is claimed that protection is an interference 
of the State to an extent which is dangerously social- 
istic ; that it is socialism for the rich manufacturer, while 
socialistic schemes coming from the poor workman are 
heartily opposed. Free-traders, moreover, deny that any 
case has been fully shown where foreigners have actu- 
ally destroyed industries by lowering prices temporarily. 
Shortly after 1833, when English iron was so largely im- 
ported under lower duties, it appears that our own pro- 
duction was also enormously increased. But even if in- 
dustries were to disappear under foreign competition, the 
consumers of the United States would be great gainers by 
the lowered prices. 

271. The advocates of a protective tariff say that the 
tariff which keeps out foreign goods while an indus- 
try is being established does not in the end raise the 
price of these goods by the amount of the duty. After the 
home industry is established, and is able to supply a de- 
mand large enough to warrant " large production " (in 
which advantage is taken of division of labor), the price 
will fall to the home consumer. The undoubted fall in 
the prices of iron and steel, of cotton goods, etc., since the 
heavy duties of the war were imposed in 1864, are pointed 
to us as proofs of this general principle. 

To this the free-traders reply that the tariff does raise 
the prices of goods to the American consumer. No com- 
parison should be made of prices now and in the past in the 
same country to show that the tariff causes a fall in prices 



294 DESCRIPTIVE POLITICAL ECONOMY. 

in that country ; the comparison should be made between 
the prices of iron, cotton goods, etc., to-day in the United 
States with the prices of the same goods to-day abroad.* 
Of course, no one will deny that in all the protected in- 
dustries, if the duties were taken off, prices here would 
fall ; else why do the protected industries oppose the re- 
duction of the duties.-^ Free-traders admit that prices 
have fallen in the United States since 1864, but declare 
that, in the same period of time, prices have fallen in as 
great a degree in other countries which have had no tariff. 
Inasmuch as the fall of prices has been general in all 
countries, whether these countries have tariffs or not, the 
fall can not be ascribed to the tariff in any one country. 
In fact, the fall has been largely due to the progress of 
improvements, which has been much the same in all 
commercial countries. 

272. The most common argument urged by protection- 
ists is that the tariff protects the workingman. By 
this they mean that the employment of laborers depends 
upon the existence of the tariff. For to the tariff is due 
the existence of manufactures which, if unprotected, 
would cease to exist, and thus laborers would be thrown 
out of employment. They prophesy the distress and 
misery which would follow the stoppage of great factories 
which new employ thousands of operatives, and ask where 
these men and women are to find a place to work. Wages, 

* The following table, taken from the fifteenth annual report of the 
Massachusetts Bureau of Statistics of Labor, 1884, shows how our 
prices actually compare with those in England ; 

-,, t • \ Higher in U. S. Lower in U. S. 

Classes of articles. p^^ cent. Per cent. 



Groceries 

Provisions, including meat, eggs, butter, 

and potatoes . . 23 

Dry goods (all grades) 

Boots, shoes, and slippers 

Clothing 




FREE TRADE AND PROTECTION. 295 

they say, are higher in the United States than in Eng- 
land, which has no tariff, and the investment of capital 
in manufactures increases the demand for laborers ; con- 
sequently, wages are kept at a higher level because of 
protection. Moreover, in the United States, at the be- 
ginning of the century, wages were very low, but they 
have risen since, so that the laborer is vastly better off 
than he ever was before in the history of the country. 
Now, since we have had tariffs for protection for nearly 
the whole of this century, it is clear that the rise in 
wages is due to the existence of the tariffs. They add 
that, if the duties were taken off, the wages of working- 
men would be lowered to the level of the " pauper labor " 
of Europe. 

273. Free-traders admit that wages in the United 
States are higher than in England, and that wages are now 
higher than they were in 1800 ; but they deny that the 
tariff keeps wages as high as they would be under free ex- 
change. It is usual for them to call attention to the well- 
known fact that wages in free-trade England are higher 
than in protectionist Germany or France \ so that, clearly, 
a tariff has not been the cause of high wages in Germany 
and France. To reason that a tariff (which is taxation) 
can have caused the industrial progress of the United 
States is to overlook the thousand things which 
have affected the production of wealth in this 
country : our wonderfully rich natural resources ; the high 
civilization of our population from the start in a new coun- 
try ; the energy, intelligence, ingenuity, and power of in- 
vention of American laborers ; the stimulating forces of 
our democratic institutions ; and the enormous growth of 
capital which has outstripped even the growth of popula- 
tion. They add that wages have risen in Great Britain in 
a similar way since the establishment of free trade in that 
country in 1846. 

274. To the claim that wages would fall if foreign 



296 DESCRIPTIVE POLITICAL ECONOMY. 



competition were to force some mills and factories to stop, 
free-traders reply, What is it that governs the rate of wages ? 
Taxation by the Government can not increase wages, of 
course ; for to take away a portion from the product does 
not increase the amount which can go to wages. Moreover, 
if, under free trade, an industry ceases to exist, what does 
that mean ? It does not mean the destruction of the 
labor or of the capital (unless the change comes very sud- 
denly, which no one proposes), and so the elementary 
forces exist for other production. But what production ? 
If the goods are now imported instead of being made here, 
goods must be produced to pay for the new imports. If, 
when left to itself, capital gives up one industry and goes 
into another, under any system, that is evidence that the 
abandoned industry is the less productive of the 
two ; and if the new industry is more productive, then 
there will be more wealth produced to be divided between 
labor and capital, and wages and interest will be higher. 
Their meaning can be shown by the accompanying dia- 
gram. Let the length of A D represent the productiveness 

of one set of industries as com- 
pared with another set repre- 
sented by B E, which is greater 
by E G. Now, if A D is given 
up and resort is had to B E, 
there will be more to divide be- 
tween labor and capital, and so 
wages and interest will be greater. 
275* Protectionists, however, here claim that the di- 
version of so much capital and labor from A D to B E 
will soon cause the exhaustion of the richest re- 
sources, and that, by the law of diminishing returns, the 
industries of the country will become less and less pro- 
ductive, until they are no greater than is indicated by C F. 
They then declare that the country is just where it was 
before, and will again be taking up the old industries A D, 




FREE TRADE AND PROTECTION. 297 

which were equal in productiveness to C F, and wages 
will fall to their old level. 

The free-traders admit this ; but they say that, during 
the years before the productiveness of B E was forced 
down to C F, the country would be the richer by the ex- 
cess of B E over A D and C F, and there would be no rea- 
son for giving up this gain, because in the future they 
might not be able to retain it forever. It is also claimed that 
the vast demands of this country for laborers in employ- 
ments not affected by the tariff is greater than is 
supposed. The chief protected industries are those con- 
nected with the manufacture of woolen goods, iron, and 
steel, and cotton ; and yet in 1880 less than 450,000 
laborers were employed in all these employments taken 
together. In 1890 the United States Census reports the 
number of persons engaged in gainful occupations as 22,- 
735,661. Now, even if all the cotton, woolen, and iron and 
steel industries wholly disappeared (which is not believed) 
under free exchange, certainly 450,000 laborers could be 
absorbed in a country employing 22,735,661 persons. The 
census makes the following division of occupations (see 
p. 86) : 

i. Agriculture, fisheries, and mining 9,013,201 

2. Professional and personal 5,304,829 

3. Trade and transportation 3,325,962 

4. Manufactures and mechanics 5,091,669 

Total. 22,735,661 

Classes 2 and 3 are not subject to foreign competition ; 
in class 4, makers of agricultural implements, clocks, etc., 
bakers, butchers, carpenters, masons, etc., to the number 
of 3,400,000, are estimated to be unaffected by foreign 
competition. Of all the laborers reported, it is estimated 
that only 1,000,000 are affected by foreign competition.* 

276. The free-trader claims, also, that the great num- 
ber of laborers employed in ways not affected by the 

* Report of Secretary of Treasury, 1886, Ixiv. 

21 



298 DESCRIPTIVE POLITICAL ECONOMY. 



tariff furnish the main part of the supply of labor, and the 
relation of this number to capital offered for employment, 
together with the productiveness of our industries, fixes 
the general rate of wages. Moreover, these are the in- 
dustries which are most productive ; for, by the 
mere fact of needing protection, other indus- 
tries give a proof that they are less produc- 
Xr JY tive. In B D, the more productive indus- 
tries, of course, the product to be divided is 
larger than in A C, the less productive indus- 
tries. And, if the majority of industries are 
like B D, the general level of wages and in- 
terest will be high. Therefore, when men 
want to take up industries like A C, they 
find that they can not pay the same wages as 
in B D, and yet get as high a return for capi- 
tal as is common in B D. They say that the 
g high rate of wages prevents them from com- 
peting with foreigners, when, in reality, it is 
the low productiveness of their industry which, not yielding 
enough to pay both wages and " profits " as high as in B D, 
causes them to call on the State for " protection." Then, 
say the free-traders, what is really done is to raise the value 
of the product A C to a higher level, X Y, by taking D Y 
from B D and giving it to A C ; that is, protection takes 
from the more productive and adds to the less 
productive industries. This is done by allowing A C 
to sell its product at a price as high as that of the foreign 
goods, plus the duty ; or the price of goods in A C is 
raised relatively to those in B D, which means that the 
goods of A C exchange for more of the goods of B D ; 
or, vice versa, that more of the goods of B D are given for 
the goods of A C than before ; so that a part of B D goes 
to A C because of the tariff. Then, with this addition 
taken from B D, A C is able to pay the same wages and 
interest as B D, while B D must pay less in wages and 



FREE TRADE AND PROTECTION. 299 

interest than without protection. Instead of laborers be- 
ing protected by the tariff, it is also claimed that by the 
tariff the articles of common use, such as coats, hats, blank- 
ets, woolen goods, and shoes, are increased in price by the 
tariff, and the workingman must pay this increased price 
just because the manufacturer does not want to change his 
business. If the duties on wool and woolen goods were 
abolished, every man could get his clothing at about one 
half the present price. Without protection, not only would 
wages be larger, but the articles he buys would be cheaper. 

277. Free-traders point to the evident inconsistency of 
the protectionists when they ask for protection because 
wages are high in the United States, and then claim that 
protection raises wages. They assert, moreover, that, pro- 
ductiveness remaining the same, wages depend on the 
number of laborers competing for employment (see section 
187). If with existing capital laborers increase in number, 
a less proportion of the product will be assigned to them. 
When capital is rapidly increasing, laborers will receive a 
larger share, if their numbers are not at the same time 
increased. The United States, however, has permitted the 
immigration of foreign workmen to this country from all 
parts of the world (except China), who are added to the 
number of those who compete for employment by the 
capital of the United States. The free-traders hold, there- 
fore, that the Government does not protect the 
workingmen in any way which really gives them bet- 
ter wages. The capital engaged in manufacturing is pro- 
tected from the competition of foreign capital, but the 
laborer is not protected from the free immigration of for- 
eign laborers. If it is not justifiable to keep out foreign 
laborers, then it is claimed to be equally unjustifiable to 
protect some manufacturers from foreign competition. 

278. Protectionists, however, believe that, even if the 
country should gain in material wealth by free trade, there 
are other things which are of more value than increased 



300 



DESCRIPTIVE POLITICAL ECONOMY. 



wealth — that the free-traders leave out of account the 
moral and political gains from protection. A coun- 
try sufficient unto itself in all things is at an advantage 
when war breaks out. It can produce its own vessels, 
cannons, rifles, clothing, and equipments in its own yards, 
factories, and shops. Apart from the advantages of pro- 
tection for national defense, they claim that there are still 
greater advantages for the development of a well-rounded 
national life. By far the most important are the benefits 
arising from a diversity of industries. Under free 
trade, a nation seeks only to work those resources in which 
it has an advantage, and as a consequence it becomes 
one-sided. If the United States were to accept free trade, 
we should become almost wholly an agricultural people, 
and lose our industrial quickness and mechanical apti- 
tudes. From this we should drop into a backward stage 
of civilization. Under protection, however, men can find 
that variety of occupations which will meet the varying 
capacities of mankind, and so be enabled to develop 
greater efficiency in production. 

279. To this the free-traders answer by pointing out 
that the gain from free international trade is a practical 
fact ; that this international trade will go on spontaneously, 
if not restricted. This is a clear practical gain of an in- 
creased amount of wealth to the country — it is nothing 
visionary and conjectural. This distinct and demonstrable 
gain the country is asked by the protectionists to give up 
for the sake of some indefinite and doubtful moral and 
political gains. The free-traders think it better to hold 
on to the practical gain. Moreover, they strongly as- 
sert that protection has corrupted legislative life in this 
coimtry to such an extent that no needed legislation is now 
passed except by dire necessity or accident. To secure 
protection, interested men support lobbyists in Washing- 
ton, which vitiates political morals. So the free-traders say 
that the political results of protection are very dangerous. 



FREE TRADE AND PROTECTION. 



301 



280. In regard to diversity of industries, free-traders 
hold that, in any civilized country, as soon as population 
becomes dense enough to allow any division of labor in 
the community, a diversity of industries necessarily fol- 
lows, whether there is protection or not. In a very young 
colony even, besides the growers of food, there will inevi- 
tably be the carpenters, masons, butchers, bakers, shoe- 
makers, hat-makers, blacksmiths, tool-makers, wagon- 
makers, coopers, fishermen, lumbermen, painters, plasterers, 
tailors, milliners, etc. Left to themselves, people will sepa- 
rate and choose the occupations in which they are most effi- 
cient, and for which the resources and climate of the coun- 
try are best suited. In the United States we have a wide 
variety of climates and natural conditions, so that there 
must inevitably be some resort to industries of a very great 
variety. Even as things are now, we export, among other 
articles, breadstuffs, provisions, agricultural instruments, 
animals, books, carriages, clocks and watches, coal, copper, 
cotton raw and manufactured, fish, gunpowder, hides, fire- 
arms, locks, machinery, sewing-machines, manufactures of 
iron and steel, leather, naval stores, mineral and vegetable 
oils, seeds, spirits, sugar, tobacco, wbod, and furniture.* 
These are the present facts of our trade, in spite of the high 
prices of materials caused by the tariff. If we can now ex- 
port the articles just mentioned, it shows very conclusively 
that a variety of production exists great enough to " round 
out " most men. The total value of the exports in 1885 was 
$726,682,946, including 273 different classes of arti- 
cles. Of course, if we can export these articles now, we 
can under free trade. Moreover, if the duties on *' raw 
materials " entering into the manufacture of many goods^ 
such as coal, wool, and ores, were abolished, many more 
goods could be made cheaply enough to be sent abroad. 
Many kinds of heavy and bulky iron manufactures also, 

* See the values of domestic exports in the United States statistical 
abstract, 1885. 



302 



DESCRIPTIVE POLITICAL ECONOMY. 



such as stoves, furnaces, pipes, hollow-ware, must necessa- 
rily be produced at home, because the transportation of 
such commodities is very costly. The iron and coal de- 
posits of Alabama and Georgia, moreover, promise to give 
us natural resources superior to many of those now worked 
in the North. There would, therefore, be a great diver- 
sity of industries under a system of free trade. 



CHAPTER XXVIL 

BIMETALLISM. 

281. Next to questions of taxation and the tariff, 
probably no other subjects deserve more attention in this 
country than those connected with money. These mat- 
ters are practically settled by the ballot-box, since Con- 
gress generally reflects the opinions of those who elect its 
members. Consequently, there ought to be a wide-spread 
knowledge of the principles of money, and of the actual 
results of experiments which have been tried. The United 
States have been, in this respect, a fruitful source of in- 
formation on monetary questions, for almost every kind 
of money has been tried here. Especially valuable is the 
experience of the United States in regard to bimetallism, 
by which is meant the legal use of both gold and silver in 
our coins at a fixed ratio to each other. 

282. In a bimetallic system, two kinds of money are 
each a legal tender ; and by legal tender is meant a money 
which when offered by a debtor in payment of an existing 
debt must be accepted by the creditor as satisfaction.* 

* Some people think that, because a silver dollar is "legal tender," 
if they go into a store, ask for a pair of gloves for a dollar, and offer a 
silver dollar in payment, the shopkeeper must hand over the gloves. 
They overlook the fact that the dollar is a legal tender only for debts 
already existing ; but that the buyers have not yet made a bargain, or 
created a debt. The shopkeeper can not be obliged to part with his 
goods against his will, no matter how much is offered him. 

(303) 



304 DESCRIPTIVE POLITICAL ECONOMY. 

Both gold and silver coins, under bimetallism, are legal 
tender. When a coin is adopted, the Government must 
decide how many grains of gold or silver to put in it. 
At present 23.22 grains of pure gold, with 2.58 grains of 
alloy to harden the gold so that it will stand wear (making 
the total, or " standard weight,"* 25.8 grains), is cut in a 
round form, stamped, and called a " dollar." So, likewise, 
37 li grains of pure silver (together with 41^ grains of 
alloy, making the standard weight 412^ grains) are coined, 
and called a dollar. Unless the pure metal is coined and 
stamped by the Government, it is not a legal tender. 
Sometimes in our history both these coins have been 
legal tender, and the Government would stamp either kind 
of metal for any one who brought it to the mint. Thus a 
man who had a debt of $10 to pay could buy either gold 
or silver, get it coined, and extinguish his debt with it. 
Either 232.2 grains of pure gold or 3712.5 grains of pure 
silver would, when coined, pay his debt to another man, 
or to the State for taxes, as the case might be. 

283. In such an example, it must be remembered that, 
to get gold, labor and capital must be expended, and so 
gold has value just as any other commodity has. Its 
value depends for all practical purposes f (section 117) on 
demand and supply. The same can be said of silver, but 
the demand and supply for gold will, of course, be differ- 
ent from the demand and supply for silver, and so, if 
left to themselves, their values must fluctuate independ- 
ently of one another. If a country, then, declares that 
23.22 grains of gold and 37 ij grains of silver shall each be 
called a "dollar," and shall have equal debt- paying 

* Since 1837 all our coins contain -^ of alloy in the full, or standard, 
weight. In order to find the amount of pure metal in a coin, subtract 
i-V of its standard weight. Thus, from the silver dollar of 412^ grains, 
subtract 41.25 grains, which leaves 37iif grains of pure silver. 

f Except over long periods of time, when its value is enabled to 
conform to its cost of production. 



BIMETALLISM. 305 

power, then it goes on the supposition that 23.22 grains of 
gold and 37 ij grains of silver will be of equal value, and 
exchange for one another. In such a case, i grain of gold 
exchanges for about 16 (exactly 15.98) grains of silver, or, 
as is commonly said, the legal ratio between gold and silver 
is I : 16. It will not follow, however, that i grain of gold 
will at all times exchange for 16 grains of silver simply 
because the law has fixed this as the relative weights in 
coins of the same denomination. If the value of g"old is 
affected by causes different from those affecting 
silver, then they will not remain equal to one another in 
value at the legal ratio any more than the top of a table 
will remain level, if the two legs at each end (which may 
represent the demand and supply of the two metals) are 
constantly changing in length irrespective of the others. 

284. When uncoined gold and silver change in value 
relatively to one another and to other things, independent- 
ly of their legal values in the coins, it is said that their 
" market ratios " have changed independently of their 
"mint ratios." That is, if i grain of gold in coin is made 
by law to exchange equally for 16 grains of silver coin, we 
say that the mint ratio is 1:16, But, if a great discovery 
of silver is made, and silver bullion falls in value (just as 
wheat, when its supply is increased), and if, in the markets 
for gold and silver bullion, t grain of gold buys 20 grains 
of silver (as it does to-day), then we say that the " market 
ratio " has fallen to i : 20. Now, if such a thing were true, 
and if either gold or silver were legal tender, men would 
pay their debts by offering the cheaper money. 
It is easy to see hov/ this can be done, and why there is a 
profit in doing it. In the coins, i grain of gold ex- 
changes for 16 grains of silver. Now, if a man should 
take his gold coins, melt them up, and exchange his gold 
for silver bullion, he could get in the open market 20 
grains of silver for every grain of gold. But, by taking to 
the mint only 16 grains out of every 20 (pocketing 4 grains 



300 DESCRIPTIVE POLITICAL ECONOMY. 

as profit), the Government would coin the i6 grains, and 
as coin they would pay off a debt as well as i grain of 
gold. Whenever two kinds of money are legal 
tender, the cheaper will be used, and the other 
will disappear. This is familiarly known as Gresham's * 
law. 

285. As has been already said, in order that Gresham's 
law should operate, both of the two metals must be a legal 
tender in all payments. But, in addition, there must also 
be free coinage. By this is not meant the coinage of 
gold and silver by the United States mints free of charge 
to the owners of bullion. The charge for the expense of 
coinage by the Government is called " seigniorage " ; but 
since 1875 no such charge has been made in the United 
States. This is not the sense in which the expression 
"free coinage" is generally used. Coinage is considered 
free when any private person has a right to bring gold 
and silver bullion to the mint in any quantities and have 
it coined (whether he is charged seigniorage or not). 
Coinage is not free when, for example, the Government 
(as at present under the operation of the Bland act) alone 
has the right to have bullion coined, and withholds this 
right from private persons. Of course, if the Government 
alone can present bullion to be coined, private individuals, 
as already explained, will be cut off from the profit gained 
by changing their bullion into coin. Gresham's law will 

* Sir Thomas Gresham was an English merchant and financier 
of the time of Elizabeth. He was asked to inquire into the condition 
of the coins in Amsterdam, in connection with which he first formu- 
lated his " law " in regard to coins of the same metal. He saw in Am- 
sterdam, when there as factor for the English Government, that, in the 
great variety of foreign coins in circulation, the old and worn coins 
drove out of circulation the new coins of full weight, which were issued 
in abundance. A similar case in England is described in Macaulay's 
" History of England," chap, xxi, and a curious illustration of the 
same principle in Japan is given in Jevons's " Money and Mechanism 
of Exchange," p. 84. 



BIMETALLISM. 307 

not properly operate, therefore, where the free coinage of 
one of the two metals is not permitted. Just as a farmer 
goes with his basket of eggs to that one of two shops in 
which he can get the higher price for eggs, so, under Gres- 
ham's law, the owner of gold or silver bullion will either 
sell it in the bullion market or take it to the mint, accord- 
ingly as he can gain the more by it. If silver is by law 
rated above its value in the coins, he takes it to the mint ; 
but, if free coinage does not exist, the mint is closed to 
him, and the operation ceases. He is thereby prevented 
from taking advantage of the difference between the mint 
and market values of gold and silver. 

286. The United States began, in 1792, with a bime- 
tallic currency of gold and silver, on the recommendation 
of Alexander Hamilton, the first Secretary of the Treas- 
ury. It was agreed to call 37 ij- grains of pure silver a 
dollar, and, of the gold coins,* 24! grains were also made 
equal to a dollar. But, as 37 ij is 15 times 24f, this was 
establishing the legal ratio of i 115 between gold and silver 
coins. At that time people considered either gold or 
silver good enough ; in fact, they were very glad to get 
any specie, after the extraordinary disasters of the Conti- 
nental paper-money. In 1792 this mint ratio of 1 : 15 
was the same as the market ratio ; that is, one ounce of 
gold bullion would buy 15 ounces of silver bullion in the 
open market. So long as that remained true, it made no 
difference whether owners of gold or silver sold it as 
bullion or had it coined, for it would be of only the same 
value in either case ; so that both gold and silver coins 
would have remained in use. Hamilton did not realize 
that a change was going on at the very time he began his 
system, which was soon to throw it out of order. 

287. By 1780 the yield from the silver mines of Mex- 
ico began to be enormous, and so continued until 1820. 

* Although no gold dollar-pieces were struck before 1849, one 
tenth of an eagle was 24! grains. 



3o8 DESCRIPTIVE POLITICAL ECONOMY. 

So great was this production that it had been equaled 
only by the great discoveries in the i6th century. This 
extraordinary increase in the supply of silver began 
to lower its value relatively to gold in the bullion market, 
although the legal ratio of i : 15 remained unchanged. 
The change in the value of silver relatively to gold may 
be seen in Chart IX, which gives the ratio by years since 
1687. It can be seen how the value of silver fell below 
the legal ratio of i : 15 after 1793, and never again rose as 
high. As both gold and silver were legal tender, and 
there was free coinage for both, so, by Gresham's law, the 
cheaper silver drove out the dearer gold coins, and noth- 
ing but silver coins were to be found. In 1808 about 16 
ounces of silver could be bought with i ounce of gold ; 
but, as coin, the gold would only exchange for 15 times as 
much silver; hence, gold was more valuable as bullion 
than as coin. But, in the form of coin, silver would buy 
more gold than as bullion ; hence silver was more valua- 
ble as coin than as bullion. So coins of gold disappeared, 
and those of silver alone remained in circulation. 

288. The country regretted the disappearance of gold, 
and by 181 7 began to suggest remedies. At last, in 1834, 
a new coinage act was passed in order to bring gold 
into circulation. It was not then understood what causes 
were at work to change the relative values of gold and 
silver. Hence, in 1834, since it was found that, as bullion, 
gold exchanged for silver in the ratio of i : 15.7, and as it 
was supposed that silver might fall still more, the ratio 
between the metals in the coins was fixed at i : 16 (or, by 
the act of 1837, exactly i : 15.988). Now, the situation 
was just the opposite of what it was before 1834. Gold 
was now worth more as coin than as bullion, and silver 
more as bullion than as coin. An ounce of gold coin 
would buy 16 ounces of silver coin, but an ounce of gold 
bullion would buy only 15.7 ounces of silver bullion. 
Consequently, gold coins began to come into circulation 



















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BIMETALLISM. 



309 



and silver to disappear. This movement, moreover, was 
hastened later by the production of the Russian gold 
mines about 1840, and by the extraordinary discoveries of 
gold in California and Australia in 1849. The consequent 
increase in the supply of gold has never been equaled in 
the history of the precious metals, and, of course, it low- 
ered its value somewhat. An ounce of gold bullion in 
1853 brought only 15.3 ounces of silver bullion. So the 
difference between the mint ratio of 1S34 and the market 
ratio became still greater owing to the vast production of 
gold, and this increased the tendency to coin gold and to 
withdraw silver from circulation. 

289. So far had this tendency manifested itself that 
by 1849 even the small silver coins had disappeared, and 
people could not make " change " in retail trade. So great 
an inconvenience led to another coinage act in 1853. 
All hope of a bimetallic currency was practically given 
up. It was found that, in order to keep both gold and 
silver coins in circulation, the legal ratio must be kept the 
same as the market ratio ; and, as this could not be done 
except by constant changes, it was accepted as impossible. 
In reality, we had had only a silver currency before 1834, 
and since then only a gold currency ; although in our laws 
both metals were a legal tender. In 1853, consequently, 
the ratio was left untouched, and the existing gold circu- 
lation was accepted as satisfactory. The act of 1853, 
however, changed the weight of the subsidiary silver coins. 
Since 1792 two halves, four quarters, etc., weighed as 
much as a dollar-piece, or 37 li grains of pure silver ; and 
when it became profitable to melt up dollar-pieces, it be- 
came equally profitable to melt up the small coins. Hence 
fractional silver had disappeared with the dollar-pieces. 
A dollar in silver had now become worth 1.04 cents in 
gold ; so every one used the gold dollar of 100 cents as 
the cheaper one. To meet the trouble about small coins 
in 1853, their weight was reduced so that in two halves, 



3IO 



DESCRIPTIVE POLITICAL ECONOMY. 



four quarters, etc., there were only 345.6 grains of pure sil- 
ver instead of 371 4. Of course, 345.6 grains were worth 
much less than 100 cents in gold, and so there was no 
reason for melting them up, as there had been before. 

290. Until the year 1862, we employed gold for large 
payments and silver for small ones. In the civil war, 
paper money drove out both gold and silver, and we did 
not resume specie payments until January i, 1879. Dur- 
ing this time, in 1873, the coinage laws were systematized 
in a new act, and as the result of this the old silver dollar 
was dropped out of the list of our legal coins, and gold 
became the only legal payment for large sums (for small 
silver coins can be offered for debts only to the amount 
of fio). In other words, the United States adopted the 
"single gold standard" in 1873-1874, or, as it was 
called, " demonetized silver." We then continued to have 
in law a single gold standard until 1878.* 

291. In 1876, there happened a fall in the value of 
silver which astonished every one. In the silver market 
of the world, London, it fell from the former usual price 
of about 60^. per ounce to 46!^. per ounce. It rallied 
again, as may be seen in Chart IX, but to-day it is lower 
than it was even in the silver panic of 1876. The cause 
of this has been ascribed to the action of Germany, which, 
in 1873, gave up its silver currency and adopted a gold 
one. Then, in 1874, the Latin Union (composed of France, 
Belgium, Switzerland, Italy, and Greece) stopped the free 
coinage of silver, and by 1878 ceased coining it altogether. 

* In 1873 the mint was permitted to stamp 378 grains of pure sil- 
ver in the semblance of a coin, looking like a dollar, for the conven- 
ience of men in the trade with China, who wanted to use silver to buy 
goods with, but who wanted a piece heavier than the Mexican dollar 
(of 377J grains). This was not a legal coin ; it was only a coined ingot. 
Ic was called a " Trade Dollar," got into circulation in the United 
States, caused some trouble, and its coinage was finally forbidden. 
See the author's " History of Bimetallism in the United States," pp, 
102-105, 208-210. 



BIMETALLISM. 



311 



The real cause, in my opinion, however, was the great 
abundance of gold. Since 1850 one and three fourths 
times as much gold has been produced as in the 357 years 
from the discovery of America down to 1850. How great 
this has been may be seen in Chart II (page 74). When 
gold became thus abundant, those countries whose transac- 
tions were large and increasing wanted naturally the money 
which was least bulky and most valuable. Then people 
have always had a preference for gold over silver. At 
any rate, the abundance of gold allowed France and Ger- 
many to discard silver, and gold took its place. It is like 
the case of a people, living on a cheap diet, such as po- 
tatoes, who, when they find that wheat becomes cheaper 
and abundant, take the wheat, and give up the potatoes. 
Then the potatoes, no longer being in so great a demand, 
fall in value. So it was with silver. Gold took its place 
as money, and silver was discarded. A great amount of 
silver went to India to form bangles and ornaments for 
the people there, but not enough was carried off the 
market to keep silver from falling. Then, too, the sup- 
ply of silver began to increase very largely after 1872, 
and matters were made still worse for the value of silver. 

292. Before the fall in the value of silver nothing was 
ever heard in the United States about the desire for the 
silver " dollar of our fathers." When the silver dollar 
was equal to 104 cents in gold, no one wanted to pay 
a debt in silver ; but, when silver fell in value, a great 
clamor arose for the coinage of silver dollar-pieces. This 
clearly had its origin either in a desire to pay off exist- 
ing debts in a cheap money (in default of depreciated 
paper money), or from a desire of owners of silver mines 
to keep up the demand for their product. This was 
purely dishonest, and when it resulted m the Bland act 
of 1878, by which the old legal ratio of i : 16 (estab- 
lished in 1834) was adopted, it had not the slightest 
monetary principle to justify it. In 1878, the market ra- 



312 



DESCRIPTIVE POLITICAL ECONOMY. 



tio was as low as i : 17.92, or nearly i : 18. If free coin- 
age had been allowed in the Bland bill of 1878, as at 
first proposed, all our gold would have disappeared in the 
twinkling of an eye, and only silver would have remained 
in circulation. Finally, free coinage was not granted, but 
the Treasury was required to coin at least $2,000,000 of 
silver dollars every month. No private person can have 
bullion coined into silver dollars ; and the only good the 
present coinage can do for the value of silver is the pur- 
chase of a certain amount every month. Even that has 
been of no use ; for since 1878 silver has fallen to the low- 
est price ever known. 

293. Some of the ablest writers, however, contend that 
silver has not fallen in relation to commodities in general, 
but that gold has risen. They urge that the disuse of 
silver by Germany and other countries since 1873 has 
concentrated the money demand of the world upon gold, 
and that gold has consequently appreciated in value. This 
rise in the value of gold, they say, shows itself in falling 
prices ; for, as gold rises in value, less gold is needed to 
buy other goods. The disuse of silver, they believe, has 
led to the continued depression in business, and to great 
financial distress. The appreciation of gold would also 
cause greater difficulty in paying off national debts, be- 
cause, with general low prices, more commodities would 
have to be produced and taken as taxes in order to make 
a given payment of public debt in terms of gold. 

294. On the other hand, it is fallacious to argue that 
gold is scarce solely because prices have fallen. When- 
ever prices fall, the value, or purchasing power of gold, 
rises ; but this does not prove that gold has itself risen 
because of a scarcity. It may mean that other things 
have fallen relatively to gold. Moreover, prices do 
not depend alone upon the quantity of money in use (see 
section 143), but upon money, taken together with credit 
of all kinds. When we realize that, during the civil war 



BIMETALLISM. 313 

and thereafter, not only the United States but other coun- 
tries were the scenes of extraordinary speculation and 
over-trading, finally ending in the financial panic of 1873, 
we can understand how largely a general fall of prices 
since then must have been due to the destruction of credit 
and the cessation of an inflated demand for goods. To- 
gether with this influence of undoubted strength must be 
considered the effect of improvements in processes and 
machinery in lessening the prices relatively to gold of 
many goods which enter into tables of prices. New and 
cheaper sources of supply of iron, lead, and copper have 
reduced the prices of these metals in a striking way. Final- 
ly, when we remember that the gold supply in 1850 has 
since then been not only doubled but increased about one 
and three fourths times, it can hardly be said that gold is 
dear because it is scarce. It is quite probable, then, that 
prices may have fallen for other reasons than a rise in gold 
alone. 

295. Some writers, also, admit that a single country, 
like the United States, can not alone maintain a double 
standard of gold and silver. They see clearly enough 
that one metal will soon disappear because of changes in 
the market ratios of the precious metals. But, if the chief 
commercial nations of the world, England, Germany, 
France, and the United States, should form an interna- 
tional monetary league, with an agreement to adopt free 
coinage of both gold and silver at the same ratio, say 15-2:1 
(the French ratio), they claim that so considerable a de- 
mand would thus be created for silver that its value could 
be kept at a fixed ratio to gold. For, if silver became 
very cheap, the demand for its use as money would raise 
its value ; and the more silver was used, the less would be 
the demand for gold as money. Gold would therefore 
fall and silver rise until the legal ratio between them was 
reached. 

The objections to this plan, even if it should prove a 
22 



314 DESCRIPTIVE POLITICAL ECONOMY. 

success, arise from the political difficulties in getting differ- 
ent countries to act together. To this time, the monetary 
conferences of 1867, 1878, i88t, and 1892, seem to have 
resulted in a total failure to bring about a common agree- 
ment. As the object of such a league, moreover, is to fur- 
nish a steadier standard of deferred payments (see section 
72), a much easier way to effect this, and one which any 
single country can follow by itself, is to establish a multi- 
ple standard (section 74). This would save all long con- 
tracts, like national debts, from becoming burdensome, 
owing to changes in prices due to natural causes, such as 
the progress of society and the march of improvements. 



CHAPTER XXVIII. 

UNITED STATES NOTES. 

296. When the Constitution of the United States was 
adopted in 1789, the colonists were fresh from the de- 
structive experiences of worthless Continental paper money. 
Consequently there was no expectation of any issue of 
paper money by the United States, and from that time to 
1862 no other money was made legal tender but gold and 
silver. The Constitution* forbade any State to issue paper 
money. The prevailing distrust of all paper money 
at that early time is thus well expressed by Hamilton : f 
" The emitting of paper money by the authority of Gov- 
ernment is wisely prohibited to the individual States by 
the National Constitution ; and the spirit of that prohibi- 
tion ought not to be disregarded by the Government of 
the United States." Of paper emissions, he says : " They 
are of a nature so liable to abuse, and, it may be affirmed, 

* The provisions of the Constitution relating directly to money 
are: 

Sec. 8. Congress shall have power — 

2. To borrow money on the credit of the United States. 
5. To coin money, regulate the value thereof, and of foreign 
coins. 
18. To make all laws which shall be necessary and proper for 
carrying into execution the foregoing powers, etc. 
Sec 10. No State shall . . . coin money, emit bills of credit, 
make anything but gold and silver coin a tender in payment of debts. 
f " Financial Report," vol. i, pp. 64, 65. 

(315) 



3i6 DESCRIPTIVE POLITICAL ECONOMY. 

so certain of being abused, that the wisdom of the Gov- 
ernment will be shown in never trusting itself with the use 
of so seducing and dangerous an expedient. In times of 
tranquillity, it might have no ill consequence ; it might 
even, perhaps, be managed in a way to be productive of 
good, but in great and trying emergencies there is almost 
a moral certainty of its becoming mischievous. The 
stamping of paper is an operation so much easier than the 
laying of taxes .that a Government, in the practice of 
paper emissions, would rarely fail, in any such emergency, 
to indulge itself too far in the employment of that re- 
source." 

297. The Government chartered two United States 
banks at different times, which issued notes, but after the 
second one ceased to exist, in 1837, it became the policy 
of the United States to have nothing whatever to do with 
the currency of the country. Gold and silver were the 
only legal-tender money, although the banks chartered by 
the various States issued paper money of all grades of 
honesty and value. In years past, however, the United 
States had resorted to a form of loan which was not properly 
paper money, though it has possibly led to the use of such 
currency. As early as the war of 181 2, the Government 
issued " Treasury notes," redeemable in two or three 
years, bearing interest, and receivable in payment of 
duties, taxes, and land-sales. Sometimes the interest was 
set at a very low rate, and the notes approached the char- 
acter of non-interest-bearing notes, which might be called 
paper money. These Treasury notes bore interest like a 
bond, were of large denominations, and were taken up at 
the end of their short term of one, two, or three years. 

298. When the Civil War broke out, in 1861, the reve- 
nues of the country fell far short of the new and extraor- 
dinary expenses required by the necessities of the time. 
The first loan act of the war, that of July 17, 1861, paved 
the way for our subsequent misfortunes with paper money ; 



UNITED STATES NOTES. 



317 



for, by a progress of evolution out of the old Treasury 
noteSj permission was given by Congress to issue $50,- 
000,000* of demand notes. These were called " Treas- 
ury notes " in the act, although they bore no interest, were 
payable on demand by the United States, were issued in 
denominations as low as five f dollars, and were of the 
size and general appearance of the present "greenbacks." 
Calling them " Treasury notes " did not cover the fact that 
they were distinctly a variety of paper money. In fact, 
they were at once recognized as such. " The first demand 
notes were issued in August, and paid for salaries at Wash- 
ington. They were received with reluctance, and the 
merchants and shop-keepers endeavored to discredit them. 
Railroad corporations refused them in payment of fares 
and freights, and leading banks in the city of New York 
refused to receive them except on special deposit." J The 
demand notes, however, were not made a legal tender, 
and differed favorably in this respect from the later issues 
of paper money. 

299. It is the first step which costs. Secretary Chase 
was deceiving himself in suggesting the issue of these de- 
mand notes, although called Treasury notes ; for, in his 
first report to Congress, he balanced the arguments for 
and against emissions of paper, and came to a de- 
cision against them. He saw (i) that, as Hamilton said, 
the stamping of paper was " easier than the laying of 
taxes," but yet that the Government could thereby bor- 
row a large sum without paying interest. (2) For this 
issue of paper there would be no expense beyond the 
amount of coin to be kept on hand to pay such notes as 
were presented for redemption.* (3) Instead of a motley 

* By act of February 12, 1862, this sum was raised to $60,000,000. 
f Byact of August 5, 1861. X Knox," United States Notes," p. 89. 

* With banks an amount of coin from 50 to 25 per cent of the 
notes issued is all that is needed to meet demands for redemption of 
notes. 



3i8 DESCRIPTIVE POLITICAL ECONOMY. 

currency of the various State-bank notes (which people 
generally used before the war, when gold and silver was 
not required), the issue of Government paper would fur- 
nish a convenient and uniform currency. Over against 
these advantages he set : (i) The very great temptations 
which might arise to issue paper bills without providing 
enough, or even any, coin to redeem them, and keep them 
at par with the coin. (2) A panic in the money-market, 
when everybody was wanting specie, might induce the 
holders of the notes to present them for redemption in 
sums large enough to remove all the reserve which had 
been kept on hand. (3) Above all, the danger was always 
to be feared that notes would be issued in excess, and 
that this would bring about a host of attendant disasters 
to the country. Feeling that the disadvantages were far 
greater than the advantages, he advised against the issue 
of paper money. This was the general state of the public 
mind at the beginning of the war. 

300. Through want of foresight, and from a lack of 
skill in offering bonds in such a way that people would 
take them freely, in the state of alarm then existing, the 
Secretary found the Treasury literally almost empty in 
February, 1862. The expenses of the war were enor- 
mous, few or no taxes had been levied (which was the 
vital error), and no loans had as yet been successful. 
To save the Government from a condition bordering on 
bankruptcy (into which it need never have come), it was 
proposed, as a temporary expedient, to resort to an emis- 
sion of paper money in spite of the decisions against such 
a plan only a few months before. It was pleaded that the 
issue of paper was an absolute necessity. Probably it 
was in February, 1862 ; but it never need have become a 
necessity had proper foresight been displayed. In fact, 
at the very time of the passage of the act, it was clearly 
shown by the bankers* of New York that the Government 

* Congress had a notion that our bonds should not be sold below 



UNITED STATES NOTES. 



319 



could have borrowed money enough, if it had been willing 
to pay the rate of interest which its credit then demanded. 
This first issue of ''greenbacks," to the amount of $150,- 
000,000 (they were called in the acts " United States 
notes "), created a paper money which was, as stated by 
the law of February 25, 1862, to be " lawful money and 
a legal tender in payment of all debts, public and 
private, within the United States, except duties 
on imports* and interest " (on the public debt). This 
kind of money is still in use to-day. 

301. It should be noticed that the United States began 
this issue of legal-tender paper money without any attempt 
whatever to keep coin on hand with which to redeem the 
notes. On December 30, 1861, all the banks of the coun- 
try had suspended specie payments. This meant 
that the banks were unable to pay out specie when 
called upon. It did not mean that they had failed, or had 
" suspended payments " of all kinds ; for they paid in 
other kinds of money than specie, such as State-bank 
notes. If the country generally were at any time unable 
to pay in specie, it would be impossible for the Treasury 
to get specie sufficient for its purposes. So that at the 
very start, there being no fund of specie on hand to re- 
deem the United States notes, they became inconvertible 
paper money, and their history well illustrates the dangers 
of such emissions. 

302. There was great difference of opinion about the 

par ; but, having offered 6-per-cent bonds, if the credit of the United 
States, for example, required 12 per cent, it made no difference whether 
it sold the 6-per-cent bonds at $50 (for each $100 bond), or offered a 
$100 bond at par which paid 12 per cent interest. All other nations, 
as well as corporations, sell bonds below par, if the rate of interest 
they offer is not sufficient to attract buyers at par. In that way they 
pay the market estimate of their credit. 

* The duties on imports were required to be paid in coin, whereby 
the Government got the coin with which to pay interest on the bonds 
during the time when paper was depreciated. 



320 DESCRIPTIVE POLITICAL ECONOMY. 

legal-tender act. Some people regarded it as the only 
way out of the straits in which the Treasury found itself. 
Others opposed the act because it was believed that the 
Constitution of the United States did not permit the issue 
of legal-tender paper money. It was proposed to strike 
out the clause which conferred the legal-tender quality, 
and issue the notes without it ; but the vote in the Senate 
stood 22 to 17 for retaining it. The bill was passed, be- 
cause the Treasury was empty, and because no one had 
any desire to modify the proposals of the administration. 
All regarded it, however, as simply a temporary expedient, 
by which to tide the country over a present difficulty, or 
until something better could be devised. How strong this 
feeling was can be learned from the expression of opinion 
when a second issue of $150,000,000 of United States 
notes was proposed. This return to what is undoubtedly 
the last resort in finance attracted great attention."^' Those 
who voted for the first issue hesitated to vote for the sec- 
ond ; but, in the end, this bill was passed, July 11, 1862, 
for much the same reasons as had been offered for the 
former one. The first $150,000,000 of notes had been 
paid out, and the Treasury was as badly off as before. The 
revenue from taxes was scanty, and the loans were not suc- 
cessful. The lack of wisdom in raising funds by taxes 
and the want of skill in placing loans were lamentable. 
The resort to more paper money was practically a con- 
fession of incompetence in conducting the finances. It 
was clear that the Treasury had been unable to get money 
by the usual means of loans. This confession of failure, 
of course, injured the credit of the Government, and caused 
the new notes to depreciate f (see Chart VI). The de- 

* Senator Chandler, of Michigan, introduced a resolution in the 
Senate, June 17, 1862, forbidding any increase in the amount of legal- 
tender notes. 

f The depreciation of the paper money drove out gold from cir- 
culation, according to Gresham's law, that the cheaper money will 



UNITED STATES NOTES. 



321 



preciation showed itself in a premium on gold ; it required, 
for example,. 120 cents in paper to buy 100 cents in gold. 
So that " gold was at a premium '' of 20 per cent. 

303. From the time of the second issue (in July) to 
the end of 1862 the paper steadily depreciated until a 
dollar of paper was equal to only 66^ cents of gold coin. 
This had its effect on prices, for, instead of paying a dol- 
lar in gold for a pair of gloves, one was forced to give the 
paper equivalent of gold, or $1.50 in paper. Thus the 
general level of prices expressed in paper rose. Then 
followed the result which has regularly occurred in the 
history of previous issues of inconvertible paper money. 
Since prices had risen greatly, it required more money to 
perform the exchanges of goods than before ; so that, 
very soon after an issue of paper money, people began, 
strangely enough, to complain of the scarcity of money. 
Like the use of intoxicants, the more one takes, the more 
one wants. The rise of prices led people to think that, 
by buying goods and holding them for the higher prices, 
they could make a profitable speculation ; so this specu- 
lative demand for goods raised prices still more than 
they would have risen owing solely to the quantity of 
the paper. Consequently, at times there seemed to be an 
insufficient supply of money. Instead, however, of seeing 
that this seeming scarcity was due to the unsettling of 
prices by issuing the paper, the public generally clamored 
for more money to relieve the scarcity. This, however, 
would, if issued, have increased the difficulty still more. 
In this way the emissions of paper led to a disorganization 

be used instead of the dearer. More than this, when it depreciated 
(in July, 1862) below even the value of the short -weight silver frac- 
tioiial coin, the silver coins disappeared, and, to enable retail dealers to 
" make change," the United States was forced to issue (July 17) a frac- 
tional paper currency for denominations of 5, 10, 25, and 50 cents. At 
first, these were imitations of postage stamps, but they soon developed 
into a full-fledged paper currency. 



322 



DESCRIPTIVE POLITICAL ECONOMY. 



of legitimate business, and brought about an era of 
speculation, stock- gambling, and extravagance which pro- 
duced results wholly unforeseen when the first issue was 
made. 

304. In the beginning of 1863, the Treasury was again 
unable to meet the expenses of the Army and Navy. Again 
it was the old story that the sale of bonds had been small, 
and that little money could be got by borrowing. Again, 
on March 3, 1863, another issue of $150,000,000 was au- 
thorized by Congress, making altogether $450,000,000 of 
legal-tender paper money.* Soon after this the five-twenty 
bonds began to sell rapidly, and thus the Government 
was enabled to borrow large sums of money. The very 
depreciation of the paper made the bonds salable. If the 
interest on a bond was $6 in gold, and if a $100 bond 
could be bought by $100 in paper, when the paper dollar 
depreciated to 60 cents in gold, the buyer of a bond was 
getting $6 in gold for every $60 of gold invested in a bond. 
This was equivalent to a higher rate of interest, and, when 
this rate became high enough to tempt investors to take 
the risk, bonds sold freely. It will be seen that the result 
was practically the same, if the six-per-cent bonds were 
sold below par for $60 in gold, or if the Government sold 
its bonds nominally at par but received pay in paper which 
was really worth but 60 cents on the dollar. After the 
capture of Vicksburg, and the victory at Gettysburg, in 
July, 1863, the increased confidence in the Government 
improved its credit, and that also helped the sale of 
bonds. 

305. In the beginning of 1864, the Treasury found 
that its funds were again running low ; new and unfortu- 
nate experiments with bonds (ten-forties) were made, and 

* Of this sum $50,000,000 was to be kept out of circulation, and 
used as a reserve for "temporary deposits," which the Government had 
received in large amounts. But the fractional currency issued was 
about $50,000,000, and balances this sum. 



UNITED STATES NOTES. 



323 



few were sold. The premium on gold rose * (see Chart 
VI), and the outlook for the Treasury was very dark. In 
June, 1864, Secretary Chase resigned in despair. Mean- 
while, in February, 1863, Congress had proposed to estab- 
lish a system of national banks, and the act by which this 
was created was entitled "an act to provide a national 
currency." This is suggestive, for it proves that Congress 
still held to the idea that the United States notes 
were only a temporary expedient, while it proposed 
to establish the national-bank notes as the permanent cur- 
rency of the country. In June, 1864, the national banking 
act was perfected, and in this same month (in a loan act of 
June 30, 1864) Congress took the opportunity to forbid all 
further issues of paper money by the Government, Early 
in 1865 the war came to a close, the premium on gold fell 
to 40, and every one regarded the "greenbacks" as issues 
to be withdrawn as soon as possible. By this time the 
taxes had begun to produce a large revenue, and conse- 
quently Secretary McCulloch, carrying out the plan which 
every one expected, began to pay off the United States 
notes. Realizing that they owed their origin solely to the 
stress of war, he proposed to reduce their amount and get 
ready to redeem them in specie. This wise policy received 
very general approval, f 

306. As we now look back over the war period, it is 

* At one time gold rose to a premium of 184 (a quotation of 284), 
which does not appear m Chart VI, because that is constructed on the 
average premium of each month. 

f The lower House in Congress passed the following resolution, 
December 18, 1865 : 

" Resolved, That this House cordially concurs in the views of the 
Secretary of the Treasury in relation to the necessity of a contraction 
of the currency with a view to as early a resumption of specie pay- 
ments as the business interests of the country will permit ; and we 
hereby pledge co-operative action to that end as speedily as possible." 
(Congressional Globe, December. 1865, p. 75.) Only six members voted 
against it. 



324 



DESCRIPTIVE POLITICAL ECONOMY. 



easy to applaud the wisdom which at the very first led 
Secretary Chase to decide against emissions of paper. 
But the evils which might result from these issues, after 
we weakly consented to them, were not all foretold by 
him. He expressed dimly the prevailing opinion of the 
time, which had been formed by a silent acquiescence in 
the teachings of history. The past had fully demonstrated 
the dangers of over-issue. Yet, when the pressing emer- 
gency came, all the lessons of the past were overlooked. 
As we have seen, the unsettling of prices, which caused 
speculation and extravagance, had not been considered ; 
and these results enormously affected the business of the 
country down to the panic of 1873. The subsequent de- 
pression was the more severe because the previous in- 
flation had been the greater. Then this rise of prices 
also obliged the Government to pay more for all its vast 
supplies, and so enormously increased its debt. Could 
the United States have bought supplies at gold prices, it 
need not have borrowed so much. The unnecessary in- 
crease in the debt, caused by high paper prices, which we 
are now in honor bound to pay off, produces a useless in- 
crease in the taxes which we are paying to-day. The 
resort to paper money, without the least pretense of re- 
deeming it, excites natural alarm in the minds of lenders, 
and injures the credit of the Government which 
issrues it. It is- a confession that its credit is not good 
enough to borrow money in the ordinary way ; and that, 
not having any funds, it resorts to irredeemable promises 
to pay. Lastly, and of greatest importance, is the diffi- 
culty of getting out of the situation created by the over- 
issue of paper To the minds of most men the period of 
rising prices seems bright and flourishing, but the rise due 
to an unhealthy cause must be later followed by a painful 
fall of prices. To submit to this fall is not in human 
nature. It generally happens that a patient with a bullet 
inside him will shrink from the suffering caused by a sur- 



UNITED STATES NOTES. 



325 



gical operation which, while causing present pain, may 
result in future health. 

307. This last difficulty was one which Secretary Mc- 
Culloch unfortunately had to meet when he proposed to 
contract the notes. The contraction (probably wrongly 
in this case) was looked upon as causing the fall of prices 
in 1867. This feeling, together with some personal oppo- 
sition to the Secretary, who cast in his fortunes with 
President Johnson, led to a limitation of the process of 
contraction, April 12, 1866. He was forbidden to retire 
more than $4,000,000 in any one month, and February 4, 
1868, was forbidden to make any further reduction of the 
United States notes, to which time their amount had been 
reduced to $356,000,000. Then came soon after a great 
political movement, based on the demand for more money. 
This cry for inflation was heard loudly soon after the 
crisis of 1873, and resulted in the passage of a bill by both 
houses of Congress, expanding the United States notes to 
$400,000,000, and fixing the like sum for national-bank 
notes. This inflationist scheme was so diametrically op- 
posed to the ideas of every one at the close of the war, 
that it furnishes a new warning against the use of so 
dangerous a thing as inconvertible paper. It was sup- 
posed by the inflationists, who were wholly ignorant of the 
nature of a credit collapse, and of the truth that printing 
paper does not increase the quantity of wealth in a coun- 
try, that the suffering of the country would be cured by 
the issue of more money. Although the inflationists con- 
trolled both houses of Congress, President Grant coura- 
geously vetoed the bill. Finally a compromise was 
reached (June 20, 1874), and the amount* of $382,- 

* The reason foi- this odd sum is this : vSecretary McCulloch had 
withdrawn $44,000,000 (400 — 44 = 356), and when Secretary Rich- 
ardson, without authority, reissued $16,000,000 of this " $44,000,000 
reserve," the amount outstanding was raised from $356,000,000 to 

52,000,000. This reissue of the $16,000,000 was an extraordinary 



326 DESCRIPTIVE POLITICAL ECONOMY, 

000,000 of United States notes was to be left outstand- 
ing. 

308. The country now maintained the United States 
notes as a permanent part of its circulating medium, with- 
out trying to redeem them, until January 4, 1875, when 
the (specie) Resumption Act was passed. Under this act 
the resumption of specie payments by the United States 
was not accomplished until January i, 1879. The act 
provided that for every new issue of national-bank notes 
to the amount of $100, $80 of United States notes should 
be retired. Under this arrangement the United States 
notes were reduced from $382,000,000 to about $346,- 
000,000. Then Congress again weakened in its purpose, 
yielding to the feeling of the community that contraction 
was injuring business, and on May 31, 1878, forbade 
any further reduction of United States notes. 
To-day we have this same fixed amount in circulation. 

309, After the passage of the Resumption Act, it was 
not supposed that it would be effective \ but, at the be- 
ginning of the term of President Hayes, Secretary Sher- 
man began slowly to accumulate gold in the Treasury, 
with the intention of trying to resume specie payments on 
the day named in the Resumption Act (January i, 1879). 
He was permitted to sell bonds for gold, and, after a con- 
ference in New York with some leading bankers, he was 
given gold for 4j-per-cent bonds. This amount, together 
with the gold coming in for customs in excess of sums he 
was obliged to pay out, rose by the end of 1878 to about 
$134,000,000. On December 17, 1878, the premium on 
gold disappeared, and on January i, 1879, the United 
States notes could be exchanged for gold at the United 
States Treasury ; so that a " greenback," since January i, 
1879, ^^^s been an example of convertible paper money, 
while from 1862 to 1879 it was an example of inconverti- 

financial blunder. The Secretary who did it committed other financial 
blunders. 



UNITED STATES NOTES. 



327 



ble paper money. It is not good policy, however, to 
leave open an opportunity for future over-issues whenever 
a new emergency shall present itself. It would be better 
to pay off the United States notes now in time of peace, 
and learn from the history of the past that '' stamping of 
paper is easier than laying of taxes," and is a very danger- 
ous expedient.* 

* It was supposed that the Constitution forbade the issue of legal- 
tender paper money, and, in fact, the Supreme Court so decided in 
1870, Before that year closed, however, the same court rendered a 
second decision after its membership had been changed by retirements 
and additions. The first declaration was reversed, and it was decided 
that in time of war the issue of legal-tender paper money was legal. 
Many still believed that an issue in time of peace was unconstitutional ; 
but this was settled by a third decision in 1884, in which Congress was 
permitted, if it thought expedient, to issue United States notes in times 
of peace. Now the whole question of paper-money issues lies in the 
discretion of Congress. This is a new reason why voters should pre- 
pare themselves to judge intelligently of the measures proposed by 
Congressmen who represent them. 



CHAPTER XXIX. 

BANKING. 

310. In business occupations, each person will be 
found to have more or less money on hand at the end of 
the day, which, if he puts under his pillow at night or 
hides in a drawer, will offer a temptation to burglars. It 
might be burned up in his house, or it might be lost while- 
going to and from his place of business. To save all 
risks, each man would be obliged to have a great burglar- 
proof vault at a serious expense. All this difficulty and 
expense, however, are saved by a division of labor. For if 
one vault is provided large enough for all, in which money 
can be safely deposited, one person can make a business 
of doing for a great many men what each would have 
done for himself. Such a place of deposit is found in a 
bank. Such an institution holds itself ready to pay the 
depositor at any moment, or, as it is termed, " on de- 
mand." If people have full confidence in the honesty of 
a bank management, they will generally leave the most of 
their surplus funds " on deposit," and carry very little 
around with them. Instead of money, they possess the 
right to draw money. 

311. In trying to understand clearly how banking ac- 
counts are kept, one may liken a bank to a cloak-room at 
a concert. For every article deposited a little ticket is 
given. Now, if the management of the cloak-room were 
suspected, and in the investigation it was found that there 

CszS) 



BANKING. 329 

was the proper article for every ticket, or evidence of de- 
posit, tlien it would be said that it was rightly conducted. 
But, if any articles could not be found on presentation of 
the ticket, it would be at once said that things were going 
wrong. So it is with a bank. For everything put into the 
bank vault or safe the management is to be held liable ; 
consequently, all the claims against a bank are known as 
liabilities. Then, whenever an investigation of the con- 
tents of the safe is made, there must be found inside, if 
the management is honest and efficient, either money or 
the equivalent of money (such as good, salable securities) 
to an amount equal to all that was put in. That which 
is found in the safe makes up the resources of the 
bank, and, if the bank is rightly conducted, the resources 
must always equal the liabilities. If they do not, some- 
thing is wrong. 

312. A bank requires capital to start with, just as a 
cotton-mill does. A number of people subscribe money, 
for example, to the amount of $100,000, and each $100 
is usually called a " share " of the stock. They put their 
money thus subscribed into the bank, and they hold the 
bank liable for its use. So that the paid-in capital is a 
liability. But in the beginning the safe holds $100,000 
in cash, so that the stockholders have a resource equal to 
the liability. When the bank is ready to do business, the 
account will stand thus : 



LIABILITIES, 

Capital $100,000 



RESOURCES. 

Cash $100,000 



A bank, however, can never make a profit by keeping all 
its resources in cash.* It will, therefore, begin to buy 

* A savings-bank is not regarded as a bank in the technical sense. 
It is a charitable institution, which receives deposits in small sums, and 
loans them, generally on the security of mortgages on real estate. It 
never m.akes any use of its credit. It is solely a bank of deposit, which 
invests its deposits to the best of its ability. From this income it pays 
expenses, and divides the remainder among' tl^e depositors in propor- 
23 



330 



DESCRIPTIVE POLITICAL ECONOMY. 



and sell something on which it can make a profit, just as 
any merchant does with coal or ribbons. 

313. Men often wish for legitimate reasons to borrow 
the use of capital for a time, until their own money comes 
in. A in Boston sells $20,000 worth of cotton-goods to B 
in Iowa, and B gives A his note, in which he promises to 
pay the sum in 30 days. But A has a debt to pay, and 
he wants the means of payment at once. He will take 
B's note, indorse it, and get it " discounted " at his bank — 
that is, he sells the note to the bank, and gets in return 
the means of payment he wants. The bank buys the 
note (accompanied by securities), and gives the so-called 
borrower the right to draw money, if he wants it. Some 
people speak of this as " getting a loan " from the bank, 
but in reality it is a purchase and sale. The bank 
makes a profit by giving A for the note the sum which 
the note promises to pay less the interest on it for 30 
days, or $19,900. At the end of 30 days, when the note 
is paid by B, the bank gets back its $19,900 which it gave 
for the note, and also $100 more as profit. This deduc- 
tion from the sum of a note is called discount ; but 
whenever a bank deals in securities in this way, it is said 
to resort to the function of discount. The resort to 
discount, however, is closely connected with the deposit 
function. 

314. When A sold B's note to the bank, he got some- 
thing in return in the form of a means of payment. 
When a man " gets a loan," it is popularly supposed that 
he gets actual money ; but, in truth, this very seldom hap- 
pens when the sums dealt in are large. All A wants is 
the means of paying his debt with $19,900, and it matters 
little to him how he pays it. If he can do it more safely 
by not drawing out $19,900 in cash, he will care nothing 
for actual money. If he has been given a right to draw 

don to their deposits. It is expected that the deposits will be left for 
a lonsf time;, and pot called for soon. 



BANKING. 



331 



money at any moment, why can he not transfer to his 
creditor (to whom he wants to pay $19,900) this right to 
draw money ? Then there will be no danger of losing the 
money in process of transferring it. In fact, this is what 
most business-men generally do, especially those con- 
cerned in large transactions. When they get a " loan " — 
that is, when they sell securities to a bank — they ask in 
return, not the actual money, but only the right to draw 
money. So the bank credits the borrower with a deposit, 
which means that he can draw by a check on the money 
at any time. What is important to keep in mind is that, 
when an entry is made on the books of the bank stating 
that A has a right to draw money, it is the same as saying 
that A has a deposit in the bank. Then he pays his debt 
to another man by giving him a check drawn on this de- 
posit ; or, in other words, in a check, he orders the bank 
to transfer to another person the right to draw money 
which he formerly had. This check, or transfer of his 
right, is taken as a means of payment by every one, and 
satisfies a debt (see sections 139-141). 

3I5« We have described (in section 313) how a man 
gets money to use at once by discounting a note. The 
note* becomes the property of the bank ; and it gives for 
this (i) either cash, or (2) a right to draw money, as the 

* Banks generally want more than a simple promissory note before 
they advance on it. If a borrower does not want to ask his friends to 
add their names to his note as a security to the bank that the note Mail 
be paid at maturity, he can deposit "collateral securities " with his 
note ; that is, he can deposit good bonds, or such securities as the bank 
will accept, to an amount at least equal in value to the sum he promises 
in his note. These " collateral securities " still belong to him, but, if 
he fails to pay his note when it falls due, the bank comes into possession 
of the securities, and gets the amount due them by selling the securi- 
ties. During any loan, therefore, the bank will have left in its hands 
an amount of securities equal to the loan. So these notes (secured by 
" collaterals ") form a part of its resources, capable of being eventually 
turned into cash. 



332 



DESCRIPTIVE POLITICAL ECONOMY. 



person bringing the note may prefer. As we have already 
said, to give a person a right to draw money (by an entry 
on the books of the bank) is the same as crediting him 
with a deposit, and therefore, when a note is discounted, 
it is bought either with cash or by giving a deposit for it„ 
We know from our study of the check system (sections 
139-141) that, in a community where people are in the habit 
of depositing with banks, and not carrying money about, 
they will use rights to draw money rather than actual 
cash ; so that, when a note is " discounted *' and 
no money is paid out, the bank gives for the note 
a deposit. Thus the first effect of the " discount " in 
such circumstances is to increase the deposits. Let us 
now see how the operation described in section 313 would 
appear in the bank account, supposing that A wanted only 
the right to draw, and not the actual money. 



Dr. LIABILITIES. 

Capital $100,000 

Profits 100 

Deposits ig,goo 



$120,000 



Or, RESOURCES. 

Loans (securities). . . . $20,000 
Cash 100,000 



) 1 20, 000 



The note or security left by A among the resources of 
the bank is as good as $20,000 ; and, although the item is 
made up of notes (secured by bonds, etc.), the banks in 
the United States give it the name'^ of "loans." The 
bank buys this note by giving A the right to draw $19,900 
(which is $20,000, less the interest for 30 days at 6 per 
cent), or, in other words, credits him with a deposit. Of 
course, this is aHability. The bank also holds itself liable, 
under the item of '' profits," to pay the shareholders, some 
time in the future, in the form of dividends, the interest, 
$100, when it is paid in. 

316. If everybody paid by checks drawn on deposits in 
a bank, and never used money, it is evident that the banks 



In England it is known as " securities. 



BANKING, 



333 



could loan and give only rights to draw, without being 
obliged to keep any money whatever on hand. Of course, 
people do often draw actual money from their deposits ; 
and to the extent to which the customers of the bank 
want (i) money rather than (2) rights to draw money, 
will the bank be obliged to keep on hand a reserve in 
cash to meet all possible demands. For example, suppose 
that A, who had been given a deposit of Ji 9,900 (instead 
of having drawn a check on the whole, as in section 314), 
wanted ^5,000 in cash with which to pay his workmen at 
the end of the month. The account would then be changed 
as follows : 



Dr. LIABILITIES. 

Capital $100,000 

Profits TOO 

Deposits 14,900 



.[15,000 



Cr. RESOURCES. 

Loans 



Cash. 



520,000 



95,000 
$115,000 



How much this cash reserve must be depends upon the 
good judgment and discretion of the bank-managers. 
Such part of the resources as is kept in cash earns nothing. 
In the above account, there is no need of so large a re- 
serve ; * consequently the bank will buy some safe, mar- 
ketable bonds and stocks with perhaps $85,000 of the 
cash, leaving the statement thus : 



Dr. LIABILITIES. 

Capital $100,000 

Profits 100 

Deposits 14,900 

$115,000 



Cr. RESOURCES. 

Loans $20,000 

Bonds and stocks.... 85.000 

Cash (reserve) 10,000 



)i 1 5,000 



317. The cash reserve of a bank must always be suffi- 
cient to pay any deposit which may be called for '' on de- 

* The national banks are required by law to keep 25 per cent of 
their deposits as a cash reserve, if city banks ; and 15 per cent, if coun- 
try banks. 



334 



DESCRIPTIVE POLITICAL ECONOMY, 



mand." It is therefore a matter of great importance to 
keep a proper relation between the reserve and the de- 
posits (or " immediate Habilities "). This ratio of reserve 
to deposits can be altered in two ways : (i) by an increase 
or diminution of deposits, or (2) by an increase or dimi- 
nution of the reserve. If the reserve falls relatively to the 
deposits to too great an extent the bank must stop making 
new loans. The reason of this is clear, for, in making a 
loan, there is generally some addition to deposits (since 
actual cash is not usually or always wanted), and an in- 
crease of deposits without an increase of cash reserve 
will alter unfavorably the ratio of reserve to deposits ; 
that is, there will be a greater liability with no more cash 
to meet it. The ability of a bank to lend depends 
upon the ratio of cash reserve to deposits. To see 
how this works, suppose the bank makes a new loan to 
another person, C, of $20,000, for 30 days, and he asks 
only that the sum be credited to him as a deposit on which 
he can draw. 



Dr. LIABILITIES. 

Capital $100,000 

Profits 200 

Deposits 34,800 



5135,000 



Cr. RESOURCES. 

Loans $40,000 

Bonds and stocks. . . . 85,000 

Cash (reserve) 10,000 



$135,000 



The resources will be increased by the purchase of a note 
(properly secured) to the sum of $20,000, changing the 
item of " loans " to $40,000. The discount on this loan 
is $100 ; so that $19,900 is credited to C as a deposit, and 
the deposits are increased by that amount. The $100 of 
interest is added to profits. In the former account (in sec- 
tion 316) the reserve was about two thirds of the deposits, 
but now the reserve is about one third. If one third is 
considered a proper reserve, any further loans (without an 
increase of cash reserve) would by increasing deposits un- 
duly alter the proportion of reserve to deposits, and the 



BANKING, 335 

bank will be unwilling to make further loans unless it can 
increase its reserve, and this is often done by changing 
some of its " bonds and stocks " into money. 

318. A bank, we have seen, is an institution in which 
individuals deposit money, or the means of payment, for 
which they have no immediate use, and this function is 
termed deposit. When a bank advances to individuals 
money, or the means of payment, on proper security, as 
already described, it is said to exercise the function of 
discount. An institution which both receives deposits 
and makes discounts is always to be called a bank. We 
have not mentioned another function, that of issue, 
which by some is regarded as the most important of all. 
Such persons think that unless a bank issues its own 
promissory notes, or promises to pay money " on de- 
mand " to bearer, it does not deserve the name. This is, 
however, far from correct. Look at a national-bank note 
and see what is printed on it. It is a promise of the 
bank which issues it to pay money on demand ; or, in 
other words, it is a right to call for cash at any moment. 
But a deposit also gives the right to draw money at any 
moment. When a bank makes a loan, it can give the 
borrower the means of payment in either form he pre- 
fers, either in cash, or in a right to draw on a deposit, or 
in its own bank-notes. The bank becomes the owner of 
the note given by the borrower to the bank, and, if cash 
is not demanded, it creates a liability by giving the bor- 
rower (i) either a deposit or (2) its promises to pay in 
the form of bank-notes. A bank, then, deals in securi- 
ties, paying for them not only with actual money, but, in 
many cases, by a use of its credit in the form of deposits 
or bank-notes. 

319. The way in which a bank account is affected by 
the issue of notes may be briefly illustrated. In the last 
account the ratio of reserve to deposits was already fairly 
low. With its present cash reserve, the bank may not 



336 DESCRIPTIVE PQIITICAL ECONOMY. 

wish to increase its immediate liabilities, which are demands 
that may be presented at any moment. But a bank-note 
is a liability which must be met on demand. If bor- 
rowers want loans, the bank can sell $50,000 of its "bonds 
and stocks," and add the money to its cash reserve, mak- 
ing it $60,000. The item of "bonds and stocks," of 
course, is diminished by $50,000. Now suppose that D 
wants a loan of $45,000 for four months, and asks for bank- 
notes. In the first place, as before, the resources will be 
increased by $45,000 in the form of securities (under 
"loans"). 

Dr. LIABILITIES. I Cf. RESOURCES. 

Capital $100,000 I Loans $85,000 

Profits 1,100 Bonds and stocks ... 35,ooo 

Notes issued 44,100 Cash (reserve) 60,000 

Deposits 34,800 



$180,000 



$180,000 



The $45,000, less $900 interest (or " discount "), will be 
given to D in the form of bank-notes ; but, as a bank- 
note is the promise of the bank to pay on demand, it is 
an immediate liability, while the interest, $900, is again 
added to profits, when it is paid in. In this account 
one reserve is kept to meet ail demands for cash arising 
from those who hold bank-notes, or who have deposits ; 
so that, when both deposits and bank-notes are used, a 
larger reserve must be kept than if the account stood 
as in section 317. It may be said here that in Eng- 
land before 1844, and in the United States before 1838, 
the banks kept but one reserve for both deposits and note- 
issues. 

320. It might seem at first glance as if it were an ad- 
vantage to a borrower to get bank-notes instead of only a 
right to draw money in the form of a deposit. In some 
cases this may be so. In order that A may make a pay- 
ment with a check to B, by which he transfers to B the 
right to draw money from the bank, it is necessary that B 



BANKING. 337 

should present at the bank the check * he got from A, 
and have the bank make a change on its books, declaring 
that B, not A, is now the owner of the right to draw 
money ; that is, B is not really the possessor of the right 
until he gets the bank to acknowledge his ownership on 
its books ; f so that the use of a check drawn on a deposit 
implies easy access to a bank. In country districts this 
will not be found convenient ; so that country banks 
are generally called upon for bank-notes rather 
than for the right to draw on a deposit. In these banks, 
consequently, the note-issues will be largely used, while 
the deposits and checks will be found less convenient. 
The amounts borrowed at country banks will generally be 
smaller, and the borrowers will at once want to have a 
means of payment which does not require a visit to a 
bank in order to close a transaction. 

321. In city banks just the opposite is true. The 
transactions are on a large scale, the buying and selling 
being in the wholesale as well as retail trades. Men in 
the cities, therefore, want a means of payment best suited 
to transfer great sums in safety and with rapidity. Banks 
are found near at hand, while access to them is easy and 
requires little time. If men have a large payment to make, 
they will prefer to make it by transferring the right to 
draw money rather than to run the serious risk of loss in 
carrying a great sum of money through the streets. So, 
when they borrow, they will prefer to be given a deposit 
rather than something which will be lost if stolen or 
burned up. Hence, we see the remarkable difference in 
the use made of bank-notes in city and country banks. 

* In ordinary usage it would be said in this case that B " deposited 
his check " at the bank. When A and B keep accounts at different 
banks, the case is as described in section 141. 

f For before this was done, A might, if dishonest, draw another 
check in favor of C, and, if C got to the bank before B, C would have 
become the owner of the deposit, and B's check would be worthless. 



338 DESCRIPTIVE POLITICAL ECONOMY. 

The city banks will care little for the right to issue notes 
(no matter how rich the bank is), while the country 
banks will use their notes more freely * than the deposit 
liability. 

* In his "Chapters on Banking" (page 41), Professor Dunbar il- 
lustrates this point by contrasting the condition of (i) the national 
banks of New York city with (2) those of Massacliusetts outside of 
Boston on September 30, 1884. The capital in each case is nearly the 
same. The figures are given only in millions : 

New York. Massachusetts. 

Capital , $46.2 $45-7 

Loans and securities . . . . . . . 239.0 128.6 

Notes 13.2 35.8 

Individual deposits 184.6 45.4 

It will be seen how small an amount of notes was issued by the 
New York banks compared with their deposits, and how nearly the is- 
sue of notes approached the amount of deposits in the country banks 
of MassachusettSo 



CHAPTER XXX. 

THE NATIONAL BANKING SYSTEM, 

322. Before the Civil War it was the policy of the 
National Government to have nothing to do with the cur- 
rency (see section 297). This was carried so far that in 
1846 the United States determined to keep its money in 
its own Treasury vaults, and not leave any on deposit with 
private banks.* In this way the Government withdrew from 
all connection with the money-market. In 1861, when 
Secretary Chase made his first report to Congress, he ad- 
vocated a system of national banks, proposing that they 
should be obliged to buy Government bonds to secure 
their note-issues, and thus furnish a large demand for 
bonds. Being in great need of money (see section 259), 
he thought to sell bonds in this way. The national bank- 
ing act, however, was not passed in a successful form un- 
til June, 1864 (see section 305), when it was too late to 
serve the purpose of Mr. Chase. When it did pass, it was 
urged rather as a means of stopping further issues of 

* The first United States bank (1791-1811) held the Government 
deposits, and was well managed. The second United States bank 
(1817-1837) was not so well managed. At first it held the Govern- 
ment's moneys on deposit, but Jackson withdrew them, and deposited 
them in the private ('* pet ") banks. These failed in the great panic of 
1837-1839, and the United States lost its deposits. This led to the sub- 
treasury act of 1846, which required all public moneys to be kept in 
the Treasury vaults. With a slight modification, this system exists to- 
day, 

(339) 



340 



DESCRIPTIVE POLITICAL ECONOMY. 



United States notes (" greenbacks "), and the act was en- 
titled ''an act to provide a national currency." It may- 
be seen from this that Congress, toward the close of the 
war (1864), looked forward to seeing the United States 
notes withdrawn, and the national-bank notes the sole 
currency of the nation.* This was a bold departure from 
the policy before the war, when the currency was left un- 
disturbed by the General Government. 

323. The main feature of the national banking system 
is to be found in the provisions relating to the issue of 
notes. A note is a liability, just like a deposit, which the 
bank must be ready to pay on demand ; but in the na- 
tional banking system a special part of the resources is 
set aside and pledged to secure the note-issues. This 
special fund must be invested in United States bonds, 
which are left with the Treasurer of the United States 
at Washington ; and, for every $100,000 of bonds so de- 
posited, a bank can issue $90,000 of its notes. The de- 
posited bonds still belong to the bank, and it receives the 
interest on them ; but, if the bank should fail, the Govern- 
ment could sell the bonds, and therewith redeem the notes 
of the bank. This plan has worked so well that, since the 
beginning of the system, no one has ever lost a cent by 
having in his possession national-bank notes; and yet the 
country has passed through a very serious commercial re- 
vulsion since 1873, which would have proved the ruin of 
a weak banking system. 

324, Since, as we have seen, the note of a bank is a 
liability which must be met on demand, each bank must 
be ready to redeem its notes in lawful money at its own 

* In order to give the national-bank notes a free field, an act was 
passed March 3, 1865, which levied a tax of 10 percent on all notes of 
State banks paid out by any bank after luly I, 1866. The "State 
banks " were those organized under the laws of each State, and werCs 
with some exceptions, generally unsafe. Their notes were often de- 
preciated. 



THE NATIONAL BANKS. 34 1 

counter. Besides this, it must keep a sum of lawful money 
equal to five per cent of its circulation at the Redemption 
Agency in Washington, so that any one at a distance from 
the bank can send a note to Washington and get it re- 
deemed there in lawful money (that is, in United States 
notes, gold, or silver). Then, also, any bank to whom a 
person is in debt is obliged to accept in payment the notes 
of any other national bank (whether it has failed or not). 
Thus a note of a bank in Maine is equally good in Texas 
or Oregon, and the currency is therefore uniform over all 
the United States. National-bank notes are not a legal 
tender* for private debts — that is, you can not force your 
creditor to accept them — but it is so easy to get the notes 
redeemed in lawful money (which is legal tender) that in 
practice no one ever refuses them. 

325. If a bank wishes to contract its issues of 
notes, it sends at least $9,000 of lawful money, and 
withdraws $10,000 of bonds from Washington. Then, as 
fast as the national-bank notes come in for redemption 
(because of wear and mutilation), lawful money is paid 
out for them ; but this takes a long time, and it may be 
years before the notes are thus redeemed. No one has any 
object in sending them in so long as they are well secured. 

326. For the other functions of banking, discount and 
deposit, the law has many provisions. Certain cities 
named by Congress are called reserve cities, and all 
banks in these places are required to keep a reserve on 
hand equal to twenty-five per cent of their deposits. 
Banks outside of these cities (known as " country banks ") 
need keep a reserve of only fifteen per cent of their de- 
posits. Then the country banks may put three fifths of 

* They are, however, receivable for all dues to the United States 
except for duties on imports, and can be paid by the United States for 
all its debts, except interest on the public debt and the redemption of 
United States notes. The reader should examine a national-bank notCj 
and compare it with a United States legal-tender note. 



342 



DESCRIPTIVE POLITICAL ECONOMY. 



their reserves on deposit in some bank in a reserve city ; 
and banks in a reserve city may keep one half of their re- 
serves in a bank in New York city, the place of the central 
reserve.* In this way all the banks in the system are 
closely affected by the condition of the banks in New York 
city. This is why the reserves of the New York city banks 
are so carefully watched all over the country. The re- 
serves of a bank must consist of lawful money, or clearing- 
house certificates (which are certificates of deposit of 
specie or lawful money) ; and the sum kept at the Re- 
demption Agency in Washington may be counted as part 
of the reserve. 

327. Since the passage of the Resumption Act in 1875 
there has been free banking. Banks can be established 
anywhere in the United States without limit if they con- 
form to the provisions of the act. There is nothing to 
prevent any group of men from establishing a national 
bank any more than there is to prevent them from build- 
ing a house or a steamboat. The investment in national 
banks is not confined to the rich ; and there is no mo- 
nopoly about them under the free banking system. If 
there is any advantage in holding shares in one, anybody 
who has $100, which is the par value of a single share, is 
generally able to obtain it. 

328. The national banks, however, make but little, if 
any, profit by issuing notes. As already explained (sec- 
tion 313), the profit is made by buying securities (usually 
called " making loans *') with their credit. When they 
take a man's note (with collateral security), they may pay 
him by a form of credit — that is, they may give him the 
right to draw a check on a deposit, or, if he prefers, they 
may give him a paper note, which is a promise of the bank 
to pay the bearer on demand. In either case the profit 
consists in buying the borrower's note for a sum less than 

* An act has been just passed by Congress (1887) to establish other 
central-reserve cities than New York. 



THE NATIONAL BANKS. 



343 



it will be worth at maturity ; it makes no difference to the 
profit of the bank whether the man chooses the notes of 
the bank of a deposit-accounts The bank would gain 
just as much by creating deposit-accounts and never issu- 
ing a note at all In fact, in the cities the national banks 
have largely given up their circulation, because the issue 
of notes is no profit to them, and the same object is ac- 
complished by giving borrowers the right to draw on a 
deposit - account (see sections 320, 321). There is no 
"double profit," as some people think there is, in the 
national banking system. 

329. The rapid payment of the public debt is remov- 
ing the basis on which national-bank notes are issued, and 
the high price of four-per-cent bonds makes the issue of 
notes on their security no longer profitable. In the future 
some other security than United States bonds must be de- 
vised, or the national-bank note will cease to exist. As it is, 
the notes outstanding are diminishing at a rapid rate. But, 
wholly apart from the issue of notes, the system has now 
been built into the business life of the community in con- 
nection with the functions of discount and deposit, 
and the country has never enjoyed a better regulated system 
than the present one. If it dies, we shall be plunged again 
into the limitless annoyances and obstacles of the old State 
banks, which proved so undesirable before 1864. Some 
banking system is certain to exist, either good or bad ; and 
the good one, which has furnished an unassailable cur- 
rency, and served the country well in performing ex- 
changes of goods, ought to be carefully nursed in the in= 
terests of business prosperity, for business and good bank- 
ing facilities are intimately connected. 



CHAPTER XXXL 

THE LABOR PROBLEM, 

330. We hear every day so much about the doings of 
workingmen that, although the question is a complicated 
and large one, we may venture to touch upon a few lead- 
ing ideas in connection with it. Labor organizations at- 
tract so much attention that some people think society is 
about to be revolutionized by new influences, in which 
employers and capital shall disappear. 

Labor unions are, without question, capable of render- 
ing signal services, if wisely managed, (i) So long as 
human nature is imperfect, there will be employers who 
will take advantage of their workmen. An organization, 
in such cases, enables the laborers to act as a body, and 
not as weak individuals to be separately treated with, and it 
thus enables them to fight successfully against unrighteous 
treatment. (2) They can also diffuse information as to 
differences of wages in different districts, thus aiding 
in an effective mobility of laborers, by sending them to 
places where they can better their condition. (3) Mu- 
tual insurance for loss of health, or accidents, or death 
can be rendered to members by the regular collection of 
small assessments. (4) They can combine to establish 
training-schools for industrial uses, in which children 
and unskilled laborers may get the means of earning 
higher wages, This, however, is not often the object of 
unions ; for they will not voluntarily work to increase the 
(344) 



THE LABOR PROBLEM. 



345 



number of those who compete in their own trades. In 
most cases the unions aim at combinations which will 
raise the wages paid them, shorten their hours of labor, or 
give them some share in the management of the industry 
in which they are employed 

331. In the desire to better their condition, the work- 
ingmen demand the sympathy and interest of every one * 
but, in their methods of obtaining the desired end, they 
are not always wise. The usual method of enforcing their 
demands is by strikes. These are based upon the un- 
doubted right of any man to leave an employment if he is 
dissatisfied ; but, if a large body of men leave all at once 
on a strike, they expect thereby to cripple their employer 
so much that he must yield. This, however, causes a loss 
of wages to the laborers as well as a loss of business to the 
employer. So we may properly question whether work- 
men can best accomplish their objects by strikes, and shall 
consider on what the success of strikes depends. 

332. Before ordering a strike, a labor organization must 
satisfy itself as to a variety of things. First of all, ac- 
count must be taken of the number of non-union men 
who would be willing to work at the current wages, if the 
union men should go out. It would be absolute folly for 
men to give up work, if others stood ready to take 
the vacant place at the old wages. Instead of rais- 
ing their wages, they would lose their positions. To meet 
this difficulty workmen have often been forced to adopt 
violent measures with the men who want to work (the 
" scabs ") ; that is, one body of men are to be prevented 
from working at all in order that another body may suc- 
ceed in raising their wages. This is unjust ; and, if a 
strike can succeed only by breaking the heads of other 
workmen, by intimidation, and by destruction of property, 
it can never be sanctioned in a law-abiding community. 
We do not live in Turkey ; and a non-union man has as 
much right to be protected in his life and property as any 

24 



346 DESCRIPTIVE POLITICAL ECONOMY. 

one else. The use of dynamite, the killing of policemen 
engaged in maintaining the peace, the burning of property, 
are in violation of the law by which alone any order in the 
State can exist. Such things injure the cause of the 
laborers more than they help it. 

333. Since no wages are received during a strike, the 
men should consider how long their reserve fund will 
keep them, and also how much they are certain to receive 
from other organizations. Promises are worth little. If 
their funds give out soon, they are obliged to go back to 
work at the old wages and lose a large sum.* Much de- 
pends also upon the determination of the strikers ; for, 
if the reason for striking is not a very good one, many 
will cease to hold out. Particularly, if one set of men are 
ordered out to help a strike elsewhere, there is not likely 
to be any great sacrifice made ; for these men gain nothing, 
and do not strike because their own employers ill-treat 
them. Then, too, regard must be had to the effect which 
the strike will have on the price of the article made by 
the men. If the employers have large stocks on hand, a 
cessation of work will have little effect, and if a strong 
combination of employers exists to regulate the price, it 
will then be very difficult to raise wages. If business is de- 
pressed and prices low, the employers may be quite ready 
to stop work, and a strike will invariably be unsuccessful, 

334. There are, then, many things to be carefully con- 
sidered if a strike is to succeed. If it fails, the workmen 
lose heavily. In fact, there have been comparatively few 
successful strikes. If the cause is a worthy one, for which 
the workmen are willing to undergo great sacrifices, and 
stand out a great length of time, in such a case it is far 

* In the great strike on the Missouri Pacific railway system in 1886 
the loss to the g,ooo strikers was $900,000, and to the railway com- 
pany $2,800,000, and the strikers were defeated The employes who 
did not strike lost $500,000 by being deprived of work. (See " Re- 
port of Commissioners of United States House of Representatives.") 



THE LABOR PROBLEM. 



347 



more likely that an arrangement of the difficulty could be 
made in other ways than by strikes. Strikes are too 
often the result of hasty action and of the submission to un- 
wise leaders, who are willing to draw salaries for noisy 
harangues ; and the losses to both sides might be saved by 
a reciprocal desire to talk the matter over calmly in a busi- 
ness-like fashion. There is probably scarcely a cause 
worth striking for which could not be amicably settled by 
fair-minded discussion on both sides. Conciliation 
should be more practiced than it is now. Moreover, if 
both sides can not agree as to the fairness of the demands, 
let them select between them an arbitrator in whose 
honesty and justice they have confidence, and agree to 
abide by his decision. This will avoid all losses and re- 
move a great many misunderstandings. • 

335. Some, however, claim that the laborer does not 
get his due share of the product which his labor helps to 
create, and that by organization the workmen may entirely 
change the existing method of distributing the product. 
In looking back to our study of distribution, we see that 
the " conflict between labor and capital " is very much of 
a delusion (section 190), but a very real conflict was found 
to exist in the division of the product among the different 
classes of laborers (Chapter XX). The real labor 
problem is to be found in the apportionment of shares to 
the different classes of laborers, and in the discovery of 
the means by which the lowest classes can be restrained 
in numbers, elevated in character and self-control, and 
trained to do a higher order of work for the community. 
The most skillful and efficient men will always be worth 
more to their employers, and will get higher wages than 
the unskilled. It is blind stupidity to think that all men 
can get equally high wages, or can change their conditions 
without changing themselves. The differing industrial 
capacities of men account for their claim to different rates 
of wages, other things being equal. 



348 DESCRIPTIVE POLITICAL ECONOMY. 

336. In order to apply right principles to the improve- 
ment of our fellow-men we must ultimately go back to 
Christian teaching. The teaching of the value of the un- 
seen and eternal over the seen and present lies at the foun- 
dation of saving, which should be sedulously encouraged. 
Savings-banks, postal-savings plans, co-operative banks, 
building associations, should be everywhere understood 
and established by the workmen. Each man should learn 
to set the future above the present, and thereby learn the 
secret of self-control, foresight, prudence, and saving. 
This is, in short, the whole problem of Christian charac- 
ter. Men are too often lacking in ambition because 
they do not know what to be ambitious about ; but, if it 
is brought home to them that, by a little sacrifice in 
clothing the family rather for comfort than for false pride, 
in spending less on tobacco and drink and amusements, 
they may acquire houses of their own, a little piece of 
ground to be tilled at odd times, or the possession of 
farm-stock, with all the dignity which these things will 
bring them in the eyes of their neighbors, it will be found 
that Christian and economic teaching are in complete 
accord. 

337* Then, again, as every laborer can earn more as 
he is more capable and better trained, industrial educa- 
tion ought to be stimulated in practical directions.* In- 
stead of being allowed to drift idly on, every homeless 
boy should be turned into a carpenter, or a plasterer, or a 
mason, or a plumber, or a bricklayer. The wider his 
training the better ; but, first of all, he should be educated 
practically in that direction in which he will be most effi- 
cient in existing conditions of production in this country. 
At present, no skilled workman ever finds it difficult to get 

* In the evening school in New York (on First Avenue, between 
Sixty-seventh and Sixty-eighth Streets) boys can in six months get 
enough skill to enter the various trades and earn fair wages at once. 
Similar schools are springing up elsewhere. 



THE LABOR PROBLEM. 



349 



employment. When bad times come, it is the poorest 
not the best workman who is discharged. 

338. Christian character lies at the basis of indus- 
trial progress. To obtain self-mastery, to learn how to 
adapt one's powers to a given end, to regard the higher 
and unseen good of the future as above the lower and seen 
enjoyment of the present, to learn to do what is disagree- 
able and repugnant to one's inclinations, provided it is 
right and honorable — this will enable one to reach a place 
far above that from which one started out in life. As a 
man's character improves, he will become a more valuable 
laborer in his industry. The unskilled day-laborers are 
too often chained down by their ignorance and incapacity. 
They remain unconscious of things which might stimulate 
them to better work, or, if ready for better things, they do 
not know what to do. These men claim the wisdom, ad- 
vice, and intelligent sympathy of those who are more suc- 
cessful and fortunate. It ought not to be desired that 
they should have higher wages only, but that they should 
have more prudence to govern the use of higher wages. 
In short, the essential point in the labor problem is the 
growth of the individual within himself. Character and 
industrial capacity can not be created by an act of Con- 
gress or by the intervention of the State. It is high time 
that the weak and narrow-minded recourse to the State 
for legislation on every conceivable subject should be 
abandoned for a greater growth of self-help and a more 
independent and self-confident manhood. 



CHAPTER XXXIL 

CO-OPERATION. 

339' Among the various attempts to increase the re- 
wards of laborers, to reduce the friction which often exists 
between employer and employed, and at the same time to 
touch the workmen at the point which stimulates their 
moral and industrial growth, are the several schemes of 
co-operation. Some observers look to co-operation as the 
means of relief from the "" conflict of labor and capital " ; 
but, even if this relief be not obtained by its means, it still 
promises much good to the working-classes by introducing 
a new spirit into the world of industry. The most notable 
forms in which co-operation appears are Distributive 
Co-operation, as in common stores ; Productive Co- 
operation, as in co-operative manufactories ; Industrial 
Partnership, in which laborers receive a share of the 
profits ; and People's Banks, by which credit is obtained 
for building houses, buying tools, etc. We shall describe 
these in the order given. 

340. Retail prices of common household supplies have 
been kept higher than they need be, because an excessive 
number of stores have been maintained to distribute the 
goods. Fewer stores could do more business, and do it 
more cheaply. The "profits" from such stores can be 
saved to the workingmen by distributive co-operation. By 
organizing CO-operative stores, which buy at wholesale 

prices, and charge the members only the actual expenses 

(350) 



CO-OPERATION. 



351 



of a plain establishment, the workingmen can get better 
goods at lower prices, and also build up a thriving busi- 
ness. 

Better than the gain in cheaper goods is the resulting 
experience acquired in business habits and in the manage- 
ment of financial affairs. A simple co-operative store 
calls- for no great executive skill and capacity, and may be 
made to succeed by care, honesty, patience, and forbear- 
ance. This form of co-operation has no small value in 
leading workmen by an easy path toward the management 
of complicated aifairs. Having become familiar with the 
business of buying goods, with methods of economizing 
expenses, having formed prompt business habits and 
learned how to manage accounts and investments, they 
may be able, if properly gifted, to do something more am- 
bitious than carrying on a store successfully. 

341* A few energetic persons can start a co-operative 
store. The experience of many years has furnished the 
following rules* for this purpose : (i) Hold a meeting at 
which the advantages of co-operation may be explained, 
an organization effected, and persons appointed to secure 
the necessary capital. (2) As no credit can be given by 
a co-operative store, some capital must be paid in before 
one can be opened, though the amount need not be very 
great. (3) Each share ought to be about five dollars, and 
the number held by any one member should be limited. 
Each share of capital receives a fixed rate of interest 
(about five per cent), and, if members are encouraged to 
leave their dividends undrawn, these sums may be credited 
as payments on additional shares. If dividends are thus 
allowed to remain in the general fund, the capital of the 

* The best book on this part of the subject is a little manual en- 
titled "Working-Men Co-operators," by A. H. D. Acland and B. 
Jones, published by Cassell & Co., New York, 18S4. See also the 
" Seventeenth Annual Report (1886) of the Massachusetts Bureau of 
Statistics of Labor." 



352 DESCRIPTIVE POLITICAL ECONOMY. 

store will be increased, and the store will also serve as a 
savings-bank for members. (4) If a member moves away 
he should be able to transfer his shares, with the consent 
of the committee. (5) The money subscribed as share 
capital need not all be paid at once. Weekly payments 
of ten cents are usual. Dividends on purchases also are 
to be credited as payments on the share until it is paid 
in full. (6) The selection of an executive committee is of 
great importance, for it controls the entire business. It 
appoints the storekeeper, oversees the purchases of goods 
and the finances, and the society will succeed only if the 
committee is honest and efficient. (7) At the start a 
room in the house of some member may be used until the 
business expands and success is assured. (8) " Goods 
well bought are half sold." Begin with staple groceries, 
and increase cautiously to hardware, crockery, ready-made 
shoes, clothing, staple dry-goods, hats, bread, coal, etc. 
Care should be taken where articles change with the 
fashion. (9) Sell at the same prices as are usual in pri- 
vate stores, but only for cash. (10) Give each member a 
check representing the amount of his purchase. At the 
end of a quarter he may present these and secure a divi- 
dend in proportion to his total purchases. (11) Outsiders 
may buy at the store, but members only receive dividends. 
(12) Account of stock should be taken quarterly or 
semi-annually, and profits then divided. (13) An auditor 
should be elected by the members to examine the ac- 
counts and make a report. (14) Profits should be esti- 
mated after first deducting from the gross receipts the fol- 
lowing payments : [a) Interest on loans, if any ; (^) 
charge for depreciation in the value of the stock and 
plant ; {c) reduction of expenses incurred in forming the 
society, if any; (<^) five-per-cent dividend on the share- 
capital; (e) a reserve fund; (/) dividend on purchases 
and bonus to employes. 

342. By following these rules faithfully there might be 



CO-OPERA riON. 353 

a successful store in every village. There have been a 
great many established in various countries, but the one 
at Rochdale in England is the best known. It began in 
1844 in a modest room in Toad Lane, with 28 weavers as 
members, each subscribing ^i. "When the day and 
hour for commencing business arrived, the little party as- 
sembled within . . . were abashed at the largeness of the 
crowd assem.bled. . . . Some delay took place before any 
one could muster up courage to take down the shutters, 
and when at last the ' store ' and its contents were ex- 
posed to public view, all Toad Lane was in a roar. Long 
and loud were the shouts of derision. . . ." * But suc- 
cess was steadily won. In 1884 there were 11,161 mem- 
bers, with a share capital of ;^329,47o, and investments of 
^^242, 432. The goods sold in 1884 amounted to ^262,- 
270, on which the net profit was ;^36,992, and the aver- 
age dividend paid per pound was 2s. ()\d.\ In Lawrence, 
Mass., the employes started a store in 1884 on a similar 
plan, with a capital of $3,320, and the first year the capi- 
tal was turned over eleven times, earning $2,273 ^s net 
profits. X 

343. When workingmen have tried to establish fac- 
tories for productive co-operation, they have not 
always achieved such signal success. This has probably 
been due to the scarcity of entrepreneurs^ or successful 
business managers. It is unnecessary to say that not 

* W. T. Thornton, " On Labor," p. 376. 

f The extension of retail co-operative stores led to the establishment 
of wholesale stores. These in England united, and now own manu- 
factories in London, Manchester, Newcastle, Leicester, Durham, and 
Crumpsall ; depots in Cork, Limerick, Kilmallock, Waterford, Tippe- 
rary, Tralee, and Armagh for the purchase of butter, potatoes, and 
eggs ; and four steamships. They have buyers in New York and Co- 
penhagen, and a banking department with a " turn-over " of more 
than ;!^ 1 2, 000,000 annually. 

X " Report of Massachusetts Bureau of Statistics of Labor, 1886," 

p. 151- 



354 



DESCRIPTIVE POLITICAL ECONOMY. 



every workman can manage a shoe - factory or cotton- 
mill successfully ; for the competition in producing goods 
is now so severe that the keenest business-men are put to 
their wits' end to equal their rivals. A greater and greater 
ability is needed to succeed in productive enterprises. 
Even if a co-operative society had in it a man capable of 
directing production successfully, it could not keep him 
unless it were to pay him as large wages of superintend- 
ence as he could get outside ; and this such societies have 
generally been unwilling to do. In England, however, the 
directors of co-operative factories and mills have some- 
times paid sufficient wages to secure competent managers. 

The extension of co-operative stores should make co- 
operative production more easy. Having a market already 
secured in the stores of their societies, they should be to 
some extent relieved from the most difficult part of the 
manager's duty. But this will not always do ; for, unless 
the retail stores can get their goods as cheaply from co-op- 
erative mills, they will buy from outsiders.* On the other 
hand, it will be to the interest of every workman to save 
materials, and to do good work, in order that the estab- 
lishment of which he is a member should succeed. In 
times of depression, a reduction of wages to the necessities 
of life may be submitted to when voted by the members 
themselves. 

344. Only men of honesty, energy, and good business 
capacity have been able to succeed in productive enter- 
prises, while there have been many failures. The Co- 
operative Barrel Association, of Minneapolis, f established 
in 1874 with a membership of about twenty coopers, col- 
lected $15 from each man, and levied $5 a week on the 
wages of each as capital. They bought a shop for $3,000, 

* In 1883, it appears that the English retail stores bought from the 
wholesale society (whose capital is supplied by the retail associations) 
only 25^ per cent of the total goods sold by them. 

f See " Co-operation in a Western City," by A. Shaw, i{ 



CO-OPERATION, 355 

paying $1,000 in cash. The profits were to be divided in 
proportion to the work done. In 1885, the paid-up capital 
amounted to $50,000, and it is stated that the company's 
real estate was valued at $23,000, and that it owned a 
stave-factory worth $25,000. 

The Somerset Co-operative Foundry Company, in Mas- 
sachusetts, began in 1867 with a capital of $15,000, and 
an annual product of $25,000. No dividends were de- 
clared in 1872, 1875, 1879, and 1880, but in other years 
they have averaged over 10 per cent. The capital rose to 
$30,000, and the value of the annual product to $75,000, 

In other countries productive co-operation has had 
varying success. In England, a natural difficulty arises, 
which is suggestive. The wholesale society furnishes the 
capital for productive establishments and owns them. 
Some expect to have the profits divided according to pur- 
chases ; others claim that the profits should go to the em- 
ployes in the factories who produce the goods. Here is 
the old question as to the proportion which shall go to 
the laborer and to the capitalist. 

345. Because of the serious difficulties in carrying on 
production by themselves, workmen have had offered to 
them in some cases a share in the profits of the busi- 
ness in which they are engaged, in addition to the current 
rate of wages. Workmen thus treated feel a natural in- 
terest in the success of the establishment. They save ma- 
terials, stop waste, work more efficiently and steadily, and 
often lose the hostile feeling which sometimes exists be- 
tween employer and employed. After a certain allow- 
ance for capital and for the maintenance of buildings, 
machinery, etc., is made out of gross profits, the remain- 
der is in these cases divided according to some rule be- 
tween the owners and the workmen, the owners still keep- 
ing the management of the business in their hands, and 
supplying the capital. Business-men have objected to 
this plan, that competition is so fierce that " there are no 



356 DESCRIPTIVE POLITICAL ECONOMY. 

profits to divide." But, if the effect of the system be to 
increase the efficiency of workmen, and to increase the 
product, the amount to be divided is a new creation. It 
is also objected that workmen will be dissatisfied when no 
share is allotted to them, and to permit them to examine 
the books of the firm would be to publish to the world 
the private management of the firm, and would often in- 
jure its business and credit. This difficulty has been met 
by allowing the workmen a voice in choosing an auditor 
to examine the accounts and certify that the profits have 
been fairly divided.* 

346, By making it clear to employes that good work, 
regularity, and temperance pay, not only is their interest 
enlisted in the success of the firm by this plan, but it has 
very wide-reaching and important effects upon the 
character and habits of the workmen themselves, 
who are led to improve their conduct and their workman- 
ship. Not only does it lead them into a knowledge of the 
difficulties of business management, and give them for- 
bearance based on knowledge, but it leads to habits of 
saving and industry. The painters employed by M. Le- 
claire, in Paris, had been men of wasteful and irregular 
habits, and his relations with them were decidedly un- 
pleasant. In 1842 he began a system of profit-sharing, 
making a dividend in proportion to the amount of each 
man's wages. The effect on the habits of the workmen 
was remarkable ; they became known as careful, steady, 
and trustworthy men. The change in the relations of the 
owners and workmen at the Briggs collieries in Yorkshire, 
England, after the introduction of an industrial partner- 
ship, was even more striking. Out of a period of strikes, 
threats, discontent, and low dividends, they emerged into 
a time of quiet, regular work, contentment, and high divi- 
dends. M. Leclaire, moreover, always maintained that he 

* This is the system adopted by the Granite Works at Westerly 
Rhode Island. 



CO-OPERA TION. 



357 



had accumulated a larger private fortune by this system of 
sharing with his workmen than was possible by a wholly 
selfish policy. Certainly, if, after paying insurance, in- 
terest on capital, and fair wages of superintendence to 
owners, a balance* remains which is due to increased effi- 
ciency, a large part of it belongs of right to the workmen. 
347. In trying to set up stores, and especially in start- 
ing productive enterprises, it has been found to be more 
or less difficult for laborers to furnish capital. In short, 
one of the essential forces required for aiding workmen to 
stand on their own feet is the incentive to save and to ac- 
cumulate capital. One of the most successful methods 
adopted for this purpose appears under the name of 
building associations, or co-operative banks. In a 
few years, by monthly payments, little, if any, greater than 
they would pay for rent, members of building associations 
may become the owners of their own homes. Each share 
is generally f 200, and is sold to a member to be paid for 
in monthly installments of $1, until these payments, to- 
gether with the profits earned by the share, amount to the 
par value of the share. The money paid in in this way is 
loaned to members who want to build a house ; the secu- 
rity is the share of the borrowing member and a mortgage 
on the new house. The loans are made only to members, 
and are given to the one who, at auction, offers the highest 
premium for a loan. The borrower can get a small or a 
large sum, and has ample time for repayment, while the 
debt is constantly being extinguished. The chance of 
having a house of one's own is a very strong inducement 
to save, and it is made easy by small and regular install- 
ments. How effective this plan has been is to be seen by 
the results in and about Philadelphia, where it is said that 
one hundred thousand homes are owned by the workmen. 
There are miles of buildings owned by workmen, built by 

* For the various systems of divisions tried, see " Report of Massa- 
chusetts Bureau of Statistics of Labor, 1886," p. 158, etc. 



358 DESCRIPTIVE POLITICAL ECONOMY. 

their own savings, which stand as testimony to the value 
of this scheme. 

In Massachusetts these associations are known as co- 
operative banks,* while in Germany, Schultze, of Delitsch, 
established several years ago what were known as People's 
Banks, in order to enable workmen to get the credit with 
which to buy tools, materials, etc. They have been won- 
derfully prosperous there, and now do a business of hun- 
dreds of millions of dollars. 

* For information as to the details of carrying on such associations, 
see the law of 1877 in Massachusetts regulating their incorporation. 



INDEX. 



Abstinence of capitalist, in cost of 
production, II2. 

Bond, explained, 283 ; registered, 
283 ; five-twenty, 284, 322 ; ten- 
forty, 284, 322. 

Bank, Woman's, 183. 

Banking, 328 ; liabilities and re- 
sources, 329 ; capital, 329 ; profit 
of, 329, 330, 342 ; loans, 330 ; 
reserve, 333 ; relation of reserve 
to liabilities, 334 ; issue function 
of, 335 ; why city banks use de- 
posits instead of notes, 337 ; 
free banking in U. S., 342. 

Banks, People's, 348, 357 ; in Ger- 
many, 358. 

Banks, National, to provide a na- 
tional currency, 323 ; origin of, 
339 ; special fund to secure 
notes, 340 ; redemption of notes, 
340 ; contraction of notes, 341 ; 
reserves required, 341 ; free 
banking, 342 ; future of, 343. 

Bimetallism, 303 ; value of gold 
and silver affected by different 
causes, 305 ; operation of Gres- 
ham's law, 305; in U. S., 1792, 
307 ; act of 1834, 308 ; act of 
1853, 309 ; Bland act of 1878, 
3?li ; international league, 313. 

Building associations, 357= 

Buying and selling, 88. 

Capital, a requisite of production, 
15 ; defined, 15, 36 ; the result 
of saving, 37, 38 ; always being 



consumed, 39 ; employs labor, 
40 ; circulating and fixed, 41 ; 
law of increase of, 42 ; no free 
competition of, in the U. S., 
135 ; principle governing share 
of, in distribution, 186 ; rapidity 
of circulation of, 188 ; share of, 
diminishing, 190. 

Certificates of indebtedness, 284. 

Checks, how used, 149 ; depend on 
habit of depositing, 150, 331 ; 
clearing-house, 151. 

Clearing-House, 151. 

Coinage, 72 ; free, 306. 

Competition, free, defined, 104 -, 
free, does not always exist, 105, 
13 r ; if free, rewards in propor- 
tion to sacrifices, 114 ; not free, 
between groups of industries, 
126 ; of laborers not free, 134, 
211 ; of capital not free, 134. 

Conflict of labor and capital mis- 
understood, 201, 230. 

Consumers not distinct from pro- 
ducers, 89. 

Copper, of Lake Superior, 94. 

Co-operation, kinds of, 350 ; stores, 
profits of, 350 ; how to establish 
stores, 351 ; in Rochdale, 353 ; 
wholesale stores in England. 
353. 355 ; productive, 353 ; in 
Minneapolis, 354. 

Cost of labor, 237, 238. 

Cost of production, to be regarded 
as sacrifice, in ; abstinence of 
capitalist in, 1 12 ; sacrifice of 
laborer in, 113; low where 

(359) 



3^0 



INDEX, 



wages and interest are high, 
114, 177 ; form in which the sac- 
rifices appear, 115 ; defined, 116. 

Credit, is confidence, 143 ; wealth 
transferred by, T44 ; gives more 
effective employment of wealth, 
144 ; book-credit, 145 ; bill of 
exchange, 146 ; promissory note, 
148 ; checks, 149 ; is purchas- 
ing power, 153 ; affects prices, 
153 ; expansion of, 155 ; of U. 
S. improved, 285. 

Crisis, commercial, 156 ; effect on 
laborers, 157. 

Customs duties, are discriminat- 
ing, 277, 280 ; on what articles 
levied by U. S., 279 ; of U. S. 
criticised, 280. 

Demand, relation of money to, 
108 ; effective, 133 ; reciprocal, 

137. 

Demand and supply, 104 ; mer- 
chants concerned only with facts 
of, 13, 108 ; effect of, on terms 
of exchange, 105 ; general, re- 
ciprocal, 106 ; particular, 108 ; 
govern value when supply is lim- 
ited,_ 132-134. 

Diminishing returns, law of, stated 
and illustrated, 19 ; law denied, 
21 ; as applied to mines, 21 ; im- 
provements counteract the law 
of, 22 ; law of value of commodi- 
ties affected by, 122, 124. 

Discount defined, 330, 332, 335. 

Distribution, Book III, 175 ; prob- 
lem of, 175 ; deals with wages, 
interest, rent, 175. 

Division of labor, 48 ; according 
to capacity, 50, 93 ; according to 
places, 50, 93, 94 ; possible where 
demand is great, 51 ; at the 
foundation of all trade, 84 ; un- 
der, men can buy most by work- 
ing in a way to produce most, 
95> 96; gain arising from, 96. 

Diversity of occupations, arises 
from division of labor, 85, 301 ; 
in the U. S., 86. 

Deposit in banks, 328, 332, 335. 

Dollar, 304 ; true conception of, 
72; varies m value, 79. 



Exchange, Book II, object of, 57 , 
practical operations of, 92. 

Exchange, bill of, 146 ; bought 
and sold by banks, 147 ; ship- 
ping-point, 148. 

Efficiency of labor, important to 
employer, 239 ; should be taken 
natural resources, 239 ; inven- 
tions, machinery, etc., 240. 

Efficiency of production, 46. 

Expenses of production, 237. 

Exports and imports of the U. S.^ 
141. 

Extravagance no gain to the poor, 
41. 

France, growth of population in, 
32. 

Free trade based on division of 
labor, 290 ; foreign imports ne- 
cessary, 291 ; infant industries, 
292 ; fall of prices, 294 ; under, 
abandoned industry the least 
productive, 296 ; tariff affects 
only few workmen, 297 ; wages 
higher in unprotected indus- 
tries, 298 ; diversity of industries 
under, 301. 

Gresham's law, 166, 306, 308. 

Gold, discoveries of, about 1850, 
73> 309? 311 ; single standard of, 
in U. S., 310 ; rise in value of, 
^312. 

Gold and silver, durability of, af- 
fects their value, 126 ; existing 
supply great as compared with 
the annual supply, 127 ; value 
of, unaffected by cost of pro- 
duction for long periods, 127. 

Ground-rent, 255. 

Immigration of foreigners objected 
to, 32. 

Improvements, counteract law of 
diminishing returns, 22 ; have 
lowered prices of manufactured 
goods, etc., 119; generally fol- 
lowed by increase of numbers, 

254- 
Income tax, 274. 
Inflation movement, 325 ; error of. 

169. 



INDEX. 



361 



Interest defined, 113, 182 ; rate of, 
in loan market, how governed, 
185 ; what determines interest, 
or share of capital, 186 ; inter- 
est and wages together vary 
with the amount of the product, 
179, 188 ; fall in rate of, not al- 
ways checks saving, 187 ; rela- 
tion of interest to prices of secu- 
rities, land, etc., 190. 

Insurance for risk, 176, 183. 

International value, 138, 139. 

Ireland, increase of numbers in, 30. 

Labor, a requisite of production, 
14 ; needs capital, 37 ; no free 
competition of, in the U. S , 134 ; 
amount of, varies in different 
industries, 180 ; principle gov- 
erning share of, in distribution, 
186. 

Laborers, who are, 25 ; mental la- 
bor, 26 ; in the U. S., 31, 32, 86 ; 
law of increase of, 29 ; produc- 
tive and unproductive, 33. 

Laborers, increase of, does not 
alone increase wealth, 197 ; con- 
flict of different classes of, 201, 
230 ; groups of, 205, 206 ; un- 
skilled, supply of, 207 ; demand 
for, 209 ; skilled laborers enjoy 
a natural monopoly, 201, 214 ; 
supply of skilled, 212 ; demand 
for skilled, 213 ; withdrawal of 
demand for skilled, 216 ; not pro- 
tected from foreign laborers, 299. 

Labor organizations, limit mem- 
bership, 199 ; objects of, 344. 

Labor problem, a question of 
character, 348, 349 ; demands 
industrial education, 348 ; not 
to be solved by State, 349. 

Latin Union, 310. 

Legal tender, 160, 165 ; gold and 
silver as, 304. 

Land, a requisite of production, 
13 ; limited in amount, 18 ; 
land varies, 19 ; ownership of, 
47; superior and inferior, as 
regards fertility and situation, 
245, 246 ; price of grain grown 
on superior and inferior lands 
the same, 246. 



Malthus, law of, 29, 30. 

Margin of cultivation, 251. 

Market, meaning of a, 12 ; neces- 
sary to trade, 84 ; origin and 
use of, 90, 92. 

Merchants, use of, 90 ; concerned 
with facts of trade, 13, 108. 

Managers, industrial, need of, 222 ; 
large production demards, 224 ; 
not always owner of capital em- 
ployed, 225 ; their number small 
relatively to other classes, 227 ; 
principle determining the rate 
of wages of, 228 ; unusual gains 
of, 231 ; wages of, separate 
from interest, 182. 

Managing ability, 52. 

Money, not synonymous Math 
wealth, 7 ; is like a read, 90 ; 
facilitates exchanges, 67 ; as a 
medium of exchange, 69 ; why 
gold and silver are used as, 71 ; 
coining of, 72 ; relation of prices 
to value of, 73 ; as a payment 
for long contracts, 73 ; precious 
metals not a proper payment 
for long contracts, 75 ; increase 
of, no gain, 77 ; distinguished 
from wealth and capital, 79, 80 ; 
scarcity of, after issues of paper, 
321 ; paper, see Paper Money. 

Monopoly, effect of, on value, 131 ; 
artificial, 133. 

Moral qualities, effect on produc- 
tion, 28. 

Multiple standard, 76. 

National debt began with coun- 
try, 282 ; increased by war of 
1812, and Mexican war, 282 ; 
paid off by 1835, 282 ; greaily 
increased by the Civil War, 
283 ; in 1865, 284 ; refunding 
of, 286 ; in 1887, 286 ; of for- 
eign countries, 287. 

Non-competing groups, 211, 

Notes, promissory, 148 ; seven- 
thirty, 284 ; fractional, 285, 322 ; 
Treasury, 316 ; demand, 317. 

Notes, U. S., Constitution on, 
315 ; arguments of Secretary 
Chase for and against, 317 ; first 
legal-tender act, 318 ; second 



362 



INDEX. 



act, 320 ; issue of, created spec- 
ulation, 321 ; third act, 322 ; 
depreciation of, 321 ; contrac- 
tion of, 323 ; results of issue of, 
324 ; reduction of, forbidden, 
1878, 326. 

Nature, forces of, 14 ; used in 
connection with labor, 25. 

Natural agents, 17. 

Normal value, 117, 124, 131, 138; 
may vary, 118. 

Over-production, general, 106 ; 
particular, 13, 107. 

Paper money, 159 ; origin, 159 ; 
convertible, 160 ; legal tender, 
quality of, 160, 165; incon- 
vertible, 162 ; depreciation of 
U. S. notes, 162 ; fiat money, 
164 ; monetary habits in regard 
to, 165 ; effect of, on prices, 
167 ; delusion that inflation 
brings prosperity, 169 ; inflation 
favors debtors, 169. 

Peasant-proprietorship, 47. 

Political Economy, with what con- 
cerned, 4. 

Population, law of, 29; positive 
check, 30; negative check, 30 ; 
to be applied to lowest not high- 
est classes, 31 ; westward move- 
ment of,' 32. 

Protection defined, 289; appeals 
to national feeling, 289 ; shuts 
out foreign competition, 291 ; 
to infant industries, 292 ; is so- 
cialistic, 293 ; causes fall of 
prices, 293 ; protects working- 
men, 294, 299 ; takes from the 
productive industries, 298 ; mor- 
al and political gains of, 300 ; 
diversity of industries, 300. 

Price, defined, 63 ; can be a gen- 
eral rise or fall of prices, 64 ; 
market, oscillates, 109 ; affected 
by credit, 153, 154 ; fall of, ow- 
ing to improvements, 119 ; nor- 
mal, must cover expenses of pro- 
duction, 237 ; not high because 
wages are high, 241 ; how prices 
are affected by wages, 241 ; of 
grain not affected by rent, 253. 



Production, Book I, ii ; ill-adjust- 
ed, 13 ; requisites of, 13 ; general 
over-production, 106 ; large, sys- 
tem of, 51 ; effect on, of physi- 
cal vigor, 27 ; of mental power, 
27 ; of moral qualities, 28 ; effi- 
ciency of, 46. 

Producers not distinct from con- 
sumers, 89. 

Product, total, may vary in value, 
177. 

Produce Exchange, New York, 
t88. 

Profit-sharing, 355 ; effect of, on 
workmen, 356. 

Profits, equivalence of, 232, 

Property in wealth, 6. 

Reciprocal demand, 137; governs 
value where competition is not 
free, 138 ; governs international 
values, 138. 

Rent, does not affect the shares of 
capitalist and laborer, 175 ; not 
used in popular sense, 244 ; 
based on law of diminishing re- 
turns, 245 ; amount of, 247, 252 , 
law of, 248 ; how it works on same 
grade of land, 250 ; does not af- 
fect price of grain, 253 ; forces 
which counteract increase of, 
254 ; as applied to the U. S., 254; 
discussed as under free competi- 
tion, 256. 

Revenues of U. S., 278. 

Revenue-point, 277. 

Saving produces capital, 38 ; dis- 
position to save, on what it de- 
pends, 42 ; does not always 
diminish with fall in rate of in- 
terest, 187 ; saving for workmen, 

348. 

Sacrifice in production not to be 
confused with rewards, 113 ; 
only if competition is free, re- 
wards in proportion to sacrifices, 
114, 116. 

Seigniorage, 72, 306 ; no charge 
for, by the U. S., 72. 

Silver, production of, 74 ; fall in 
value of, after 1780, 308 ; in 1876, 
310. 



INDEX, 



363 



Strikes, when successful, 345 ; 
avoided by arbitration, 347. 

Socialism, an appeal to the State, 
262 ; opposed to self help, 263, 
265 ; State can not know ca- 
pacity of individual producers, 

264 ; socialism injures character, 

265 ; working of self-help, 266 ; 
legislative interference should be 
restricted, 268 ; should State 
take charge of production, 269 ; 
socialistic experiments within a 
State, 269. 

Specie payments, suspended 1861, 

319 ; resumption of, 326 
Standard of living, defined, 31 ; 

of foreign laborers, 32 ; varies, 

194. 
Standard weight of coins, 304. 
Supply, defined, 108. 
Surplus revenue, reduction of, 

287. 

Taxation, reason for, 271, 272 ; 
canons of, 272 ; direct and indi- 
rect, 273 ; on incomes, 274 ; of 
personal property, 275 ; rules for 
indirect, 276 ; discriminating, 
277. 

Taxes in production, 176. 

Temporary deposits, 284. 

Trade, home and foreign, 83 ; why 
trade exists, 83 ; use of a mar- 
ket, 84 ; depends upon division 
of labor, 84 ; complex, because 
of variety of desires, 87 ; home, 
illustrated by exchange of wheat 
for piano, 88 ; foreign, same in 
principle as home trade, 97-99 ; 
illustrated by exchange of home 
wheat for foreign silk, 97 ; rea- 
son for existence of, 98 ; gain 
arising from, 96, 100. 

Trade dollar, 310. 

Value, defined, 57 ; is a ratio, 58 ; 
why a thing has, 59 ; how value 
is measured, 62 ; common de- 
nominator of, 62, 68 ; can be no 
general rise in values, 64 ; laws 
of, classification of articles for 



finding the, ill ; normal, law 
of, for manufactured goods, 117 ; 
market value of same, 118 ; law 
of, for commodities affected by 
diminishing returns, 122, 124 ; 
depends on cost of that grown at 
the greatest expense, 124 ; mar- 
ket value of, 124 ; grain raised 
at different costs, 122 ; grain 
grown on different soils sold at 
same price, 123 ; tends to rise, 
128 ; forces counteracting the 
rise, 129 ; market, of commodi- 
ties affected by diminishing re- 
turns, 124 ; of gold and sil- 
ver, 125-127 ; of commodities 
where competition is not free, 
131 ; law of value of such com- 
modities, 137 ; international, 
governed by reciprocal demand, 
138 ; law of, 139 ; of product, 
parts into which it is divided, 
237- 

Wants, how supplied by society, 
3 ; are various and infinite, 
II. 

Wages, the reward of the laborer's 
exertion, 113 ; real, and money 
wages, 193 ; principle governing 
the amount of, 195, 198 ; in- 
crease of capital increases wages, 
197 ; why wages and interest 
are high in a new country, 
178, 189 ; wages and interest 
together vary with the amount 
of the product, 179 ; of superin- 
tendence, 182 ; why wages in 
one industry may be higher 
than in another, 199, 200 ; of 
different classes of laborers, 204, 
207 ; wages may vary in non- 
competing groups, 211 ; remedy 
for low wages, 210, 215 ; affected 
by climate, kind of work, social 
position, etc., 216 ; woman's 
wages, 218. 

Wealth, defined, 5 ; material 
wealth, 5,6; immaterial wealth, 
6 ; on what the amount of, de» 
pends, 47. 



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